Forecasting Seminar with Jenny Tang (Boston Fed)

Abstract: We investigate the channels through which news influences the subjective beliefs of economic agents, with a particular focus on their subjective uncertainty. The main insight of the paper is that news that is more at odds with agents’ prior beliefs generates an increase in uncertainty; news that is more consistent with their prior beliefs generates a decrease in uncertainty. We illustrate this insight theoretically and then estimate the model empirically using data on US output and professional forecasts to provide novel measures of news shocks and uncertainty. We then estimate impulse responses from the identified shocks to show that news shocks can affect macroeconomic variables in ways that resemble the effects of uncertainty shocks and that controlling for news diminishes the importance of uncertainty shocks for
macroeconomic dynamics.

Seminar will be offered virtually.

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