## Identifying News Shocks from Forecasts

_IMF Working Papers, September 29, 2023_

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## Bibliographic details
- Authors: Jonathan J. Adams, Philip Barrett
- Published: September 29, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400257377.001

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### Method and identification
- 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.

### Empirical application and data
- 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.

### Key findings
- 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.

### Policy counterfactuals and implications
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2023/09/29/identifying-news-shocks-from-forecasts-539674_