Identifying News Shocks from Forecasts

IMF Working Papers, September 29, 2023

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Proposes a method to identify the anticipated components of macroeconomic shocks in a structural VAR by including empirical forecasts about each time series in the VAR.
Inclusion of forecast data introduces enough linear restrictions to:
- identify each structural shock; and
- decompose each structural shock into “news” and “surprise” components.

Estimated a VAR on US time series using forecast data from:
- the SPF,
- CBO,
- Federal Reserve, and
- asset prices.
Identifies unanticipated fiscal stimulus and interest rate shocks and evaluates their dynamic effects.

Unanticipated fiscal stimulus and interest rate shocks identified have typical effects that match existing evidence.
In the news–surprise decomposition:
- finds that news drives around one quarter of US business cycle volatility.
- news explains a larger share of the variance due to fiscal shocks than for monetary policy shocks.
Coordinated fiscal and monetary policy:
- using the news structure of the shocks to estimate counterfactual policy rules, the authors find coordinated fiscal and monetary policy are substantially more effective than either tool is individually.

Uses the identified news structure to estimate counterfactual policy rules and to compare the ability of fiscal and monetary policy to moderate output and inflation.
Main policy implication:
- coordination between fiscal and monetary policy materially increases effectiveness in moderating output and inflation relative to unilateral use of either tool.