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Expectations and Business Cycle:Can News Shocks Be a Major Source of China’s Economic Fluctuations?
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TitleExpectations and Business Cycle:Can News Shocks Be a Major Source of China’s Economic Fluctuations?  
AuthorZhuang Ziguan, Cui Xiaoyong, Gong Liutang and Zou Hengfu  
OrganizationSchool of Finance, Zhongnan University of Economics and Law; CEMA, Central University of Finance and Economics; Guanghua School of Management, Peking University;;; 
Key WordsNews Shocks; Business Cycles; DSGE Model 
AbstractIn this paper, we formulate a simple DSGE model driven by news shocks. We introduce two types of real frictions (i.e., consumption habits and investment adjustment costs) in this simple model, because the frictions are the important factors which can generate aggregate comovement. Then, based on this model, we use Bayesian methods to estimate the role of news shocks in driving China’s business cycles since China’s reform and opening up. We find that news shocks are the most important driving force of China’s business cycle and account for more than two thirds of predicted aggregate fluctuations. Finally, we built a large-scale DSGE model without nominal frictions in order to examine whether the conclusion of the simple model is robust. Our analysis proves that. 
Serial NumberWP233 
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