News driven business cycles and data on asset prices in estimated DSGE models
BIS Working Papers No 358
Published in: Review of Economic Dynamics, vol 20, April 2016, pp 181-97.
The existing literature on estimated structural News Driven Business Cycle (NDBC) models has focused almost exclusively on macroeconomic data and has largely ignored asset prices. In this paper, we present evidence that including data on asset prices in the estimation of a structural NDBC model dramatically affects inference about the main sources of business cycle fluctuations. Combined with the large body of evidence that asset price movements reflect changes in expectations of future developments in the economy, our results imply that data on asset prices should always be used in the estimation of structural NDBC models because they contain information that cannot be obtained by using solely macroeconomic data.
JEL classification: C11, E32, E44, G10
Keywords: News Driven Business Cycles, asset prices, estimated DSGE models, Bayesian MCMC methods