When both Investment-Specific Technology (IST) news and Total Factor Productivity (TFP) news shocks compete, the former substantially dominate the latter in driving post-WWII US business cycles. At the two-year horizon, IST news shocks account for 58 percent of the forecast error variance in output, 56 percent of the variation in hours, 51 percent of investment, and 65 percent of consumption variation. By contrast, TFP news shocks account for less than 10 percent of the variation in output, hours, investment, and consumption. TFP news also fails to produce comovement and statistically significant effects on macroeconomic variables despite using the most recent vintage of TFP data from Fernald (2014). Our findings suggest shifting focus from TFP to IST news when studying news-driven business cycles.

Additional Metadata
Keywords Investment-specific news, TFP news, Shocks, News-driven business cycles
JEL Business Fluctuations; Cycles (jel E32)
Publisher Department of Economics
Series Carleton Economic Papers (CEP)
Ben Zeev, Nadav, & Khan, H.U. (2016). Investment-Specific News Dominates TFP News in Driving U.S. Business Cycles (No. CEP 16-08). Carleton Economic Papers (CEP). Department of Economics.