Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 388: TFP news, stock market booms and the business cycle: Revisiting the evidence with VEC models

Paola Di Casola () and Spyridon Sichlimiris ()
Additional contact information
Paola Di Casola: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Spyridon Sichlimiris: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Beaudry and Portier (2006) provide support for the "news view" of the business cycle, using a vector error correction model. We show that this result hinges on a cointegrating relationship between TFP and stock prices that is not stationary, thus making the estimates not reliable. If we alter the TFP measure and change the model specification, we can recover the news shock through their identification. However, the news shock leads to a stock market boom with a negligible impact on economic activity. Our findings are in line with studies that identify news shocks without relying on VEC models.

Keywords: cointegration; technology news shocks; stock prices; TFP; VEC model

JEL-codes: C32; E32; E44; G12

35 pages, March 1, 2020

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