Business cycle narratives
with Leif Anders Thorsrud.
Uncertainty is acknowledged to be a source of economic fluctuations. But, does the type of uncertainty matter for the economy’s response to an uncertainty shock? This paper offers a novel identification strategy to disentangle different types of uncertainty. It uses machine learning techniques to classify different types of news instead of specifying a set of keywords. It is found that, depending on its source, the effects of uncertainty on macroeconomic variable may differ. I find that both good (expansionary effect) and bad (contractionary effect) types of uncertainty exist.
Media coverage: CentralBanking.com
We decompose the textual data in a daily Norwegian business newspaper into news topics and investigate their predictive and causal role for asset prices. Our three main findings are: (1) a one unit innovation in the news topics predict roughly a 1 percentage point increase in close-to-open returns and significant continuation patterns peaking at 4 percentage points after 15 business days, with little sign of reversal; (2) simple zero-cost news-based investment strategies yield significant annualized risk-adjusted returns of up to 20 percent; and (3) during a media shortage, due to an exogenous strike, returns for firms particularly exposed to our news measure experience a substantial fall. Our estimates suggest that between 20 to 40 percent of the news topics’ predictive power is due to the causal media effect. Together these findings lend strong support for a rational attention view where the media alleviate information frictions and disseminate fundamental information to a large population of investors.
Oil and macroeconomic (in)stability Forthcoming: American Economic Journal: Macroeconomics
with Hilde C. Bjørnland and Junior Maih.
We analyze the role of oil prices in reducing U.S. macroeconomic volatility. The question is addressed using a Markov Switching Rational Expectation (MSRE) New-Keynesian model that accommodates regime-switching behavior in shocks to oil prices, macro variables as well as in monetary policy. Using the structural model we revisit the timing of the Great Moderation (if any) and the sources of changes in the volatility of macroeconomic variables. We find that, contrary to common perceptions, smaller and/or fewer oil price shocks did not play a major role in explaining the so called Great Moderation. Instead, we find brief periods of increased oil price volatility throughout the sample, many of them preceding the dated NBER recessions. The most important factor reducing macroeconomic variability is the decline in volatility of other structural macroeconomic shocks (demand and supply) from 1986. We find that a change to a more responsive monetary policy regime after 1982 also played a role, albeit a minor one.
The Value of News Forthcoming: Journal of Econometrics
with Leif Anders Thorsrud.
Using an LDA model, we decompose a major business newspaper according to the topics it writes about. We show that the topics have predictive power for key economic variables and, especially noteworthy, for asset prices. In a SVAR framework we identify unexpected innovations to an aggregated news index, derived as a weighted average of the news topics with the highest predictive scores, as news shocks. News shocks cause large and persistent economic fluctuations and a permanent increase in productivity. Unexpected innovations to asset prices, orthogonal to news shocks and labelled as noise, have only temporary positive effects. Both findings are in line with predictions of news driven business cycle models where the agents face a signal extraction problem, but in contrast to these models, we show that news shocks are associated with a rather broad range of news topics contributing to the economy’s future needs and developments.
Business cycles in an oil economy Forthcoming: Journal of International Money and Finance
with Drago Bergholt and Martin Seneca. Online appendix.
The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one – the world's commodity exporters combined are responsible for 15–20% of global value added. We estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway – a large, prototype petroleum exporter. Domestic supply chains link mainland (non-oil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three important results: First, pass-through from oil prices to the oil exporter implies up to 20% higher business cycle volatility. Second, the majority of spillover effects stem from non-oil disturbances such as innovations in international investment efficiency. Conventional oil market shocks, in contrast, explain at most 10% of the Norwegian business cycle. Third, the prevailing fiscal regime provides substantial protection against external shocks while domestic supply linkages make the oil exporter more exposed.