This chapter reviews and synthesizes our current understanding of the shocks that drive economic fluctuations. The chapter begins with an illustration of the problem of identifying macroeconomic shocks, followed by an overview of the many recent innovations for identifying shocks. It then reviews in detail three main types of shocks: monetary, fiscal, and technology. After surveying the literature, each section presents new estimates that compare and synthesize key parts of the literature. The penultimate section briefly summarizes a few additional shocks. The final section analyzes the extent to which the leading shock candidates can explain fluctuations in output and hours. It concludes that we are much closer to understanding the shocks that drive economic fluctuations than we were 20 years ago.

/pdf/macroeconomic-shocks-and-their-propagation-ajda5fs5br.pdf

Macroeconomic Shocks and Their Propagation

Developing economies have found it hard to use natural resource wealth to improve their economic performance. Utilizing resource endowments is a multistage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy. Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures. This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.30.1.161

Using Natural Resources for Development: Why Has It Proven So Difficult?

Recently developed structural models of the global crude oil market imply that the surge in the real price of oil between mid-2003 and mid-2008 was driven by repeated positive shocks to the demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging Asia. This note evaluates this proposition using an alternative data source and a different econometric methodology. Rather than inferring demand shocks from an econometric model, we utilize a direct measure of global demand shocks based on revisions of professional real GDP growth forecasts. We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline.

Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008?; Parenting Styles and Financial Security: How are children impacted?

There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents’ information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating their relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established. ( JEL D83, D84, E13, E32, O33)

/pdf/news-driven-business-cycles-insights-and-challenges-34i54znwnz.pdf

News Driven Business Cycles: Insights and Challenges

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion

/pdf/frictional-wage-dispersion-in-search-models-a-quantitative-43xci3t46b.pdf

Frictional Wage Dispersion in Search Models : A Quantitative Assessment, Working Paper 06-07

We identify US defense news shocks as shocks that best explain future movements in defense spending over a ve-year horizon and are orthogonal to current defense spending. Our identied shocks are strongly correlated with the Ramey (2011) news shocks, but explain a larger share of macroeconomic uctuations and have signicant demand eects. Fiscal news induces signicant and persistent increases in output, consumption, investment, hours and the interest rate. Standard DSGE models fail to produce such a pattern. We propose a sticky price model with distortionary taxation, variable capital utilization, capital adjustment costs and rule-of-thumb consumers that replicates the empirical ndings.

/pdf/chronicle-of-a-war-foretold-the-macroeconomic-effects-of-3nmix67rhu.pdf

Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defence Spending Shocks

Capital controls as shock absorbers

Emerging Economies Business Cycles: The Role of Commodity Terms of Trade News

This paper provides robust evidence that news shocks about future investment-specific technology (IST) constitute a signicant force behind U.S. business cycles. Extending a recent empirical approach to identifying news shocks, we find that positive IST news shocks induce comovement, i.e., raise output, consumption, investment,and hours. These shocks account for 70% of the business cycle variation in output, hours, and consumption, and 60% of the variation in investment, and have played an important role in 9 of the last 10 U.S recessions. IST news shocks also dominate unanticipated IST shocks in accounting for the forecast variance of aggregate variables. The findings have two important implications for research on news driven business cycles. First, they provide strong support for shifting focus to IST news shocks when investigating the role of news (or foresight) in driving business cycles. Second, an important avenue for further research is to consider structural mechanisms that can enhance the role of IST news shocks in estimated dynamic general equilibrium models.

Investment-Specific News Shocks and U.S. Business Cycles

We provide robust evidence that news shocks about future investment-specific technology (IST) constitute a significant force behind U.S. business cycles. Positive IST news shocks induce comovement, that is, raise output, consumption, investment, and hours. These shocks account for 70% of the business cycle variation in output, hours, and consumption, and 60% of the variation in investment, and have played an important role in 9 of the last 10 U.S. recessions. Our findings provide strong support for shifting focus to IST news shocks when investigating the role of news in driving U.S. business cycles.

/pdf/investment-specific-news-shocks-and-u-s-business-cycles-d8vvd0u6s8.pdf

Nadav Ben Zeev

Papers

Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defence Spending Shocks

Capital controls as shock absorbers

Emerging Economies Business Cycles: The Role of Commodity Terms of Trade News

Investment-Specific News Shocks and U.S. Business Cycles

Investment‐Specific News Shocks and U.S. Business Cycles