Patents, News, and Business Cycles

This paper constructs an instrumental variable for technology news shocks using patent applications, relaxing all identifying assumptions traditionally used in the news-shock literature. The IV is the component of patent applications orthogonal to pre-existing beliefs (Survey of Professional Forecasters), contemporaneous and lagged monetary and fiscal policy changes (narrative accounts), and own lags. The instrument recovers news shocks that have no effect on aggregate productivity in the short run but are a significant driver of its trend component. The shock prompts a broad-based expansion in anticipation of the future TFP increase—output, consumption, and investment all rise well before any material increase in TFP is recorded. Despite these positive conditional co-movements, the news shock accounts for only a modest share of macroeconomic fluctuations at business cycle frequencies. Financial markets price in news shocks on impact, while most macro aggregates respond with some delay. Previously circulated as “When Creativity Strikes: News Shocks and Business Cycle Fluctuations.”

U.S. Monetary Policy and the Global Financial Cycle

A single global factor extracted from a large panel of risky asset prices traded around the world falls sharply after a US monetary contraction, alongside deleveraging by global banks, a rise in aggregate risk aversion, contracting credit provision and retrenching international credit flows – and countries with floating exchange rates are subject to financial spillovers of similar magnitude. The paper proceeds in two empirical steps plus a model. First, a dynamic factor model fitted to 858 monthly price series for 1990-2012 – equities from North America, Latin America, Europe, Asia Pacific and Australia, corporate bond indices, and commodities excluding precious metals – supports a unique common global factor that accounts for over 20 percent of the common variation; on a narrower 303-series panel covering only the US, Europe, Japan and commodities but reaching back to 1975, one factor accounts for about 60 percent. Second, monthly Bayesian VARs with 12 lags estimated over 1980-2010 – a 13-variable closed-economy version and 15-variable global versions – are identified with an external instrument built from 30-minute price revisions in the fourth federal funds futures contract around FOMC announcements. For a shock normalised to raise the one-year Treasury rate by 1 percent on impact, the domestic responses are conventional: production, capacity utilisation and housing starts fall, unemployment rises, prices decline without a price puzzle, the excess bond premium and mortgage spreads widen, house prices and the S&P 500 fall, and the dollar appreciates. The global responses are the paper’s point. The global factor drops about 40 percent on impact, which the authors translate – under the explicit assumption that all asset prices load equally on the factor – into roughly an 8 percent fall in a local stock market, a figure consistent with the estimated US, UK and euro-area equity responses. Measured aggregate risk aversion rises by over 50 percent above its average trend. Global domestic credit and cross-border credit inflows to both banks and non-banks contract by several percentage points, with global real activity outside the US left unchanged on impact as a control, and the credit contraction is not driven by the US component. Leverage falls strongly and quickly for US security brokers and dealers and for European global systemically important banks, while broader banking aggregates react later and more weakly – no appreciable change for US banks and a European trough about a year out. Restricting the global aggregates to the 32 countries the IMF classified as independently floating leaves the credit and inflow contractions “very similar to that obtained over the full sample.” For the UK and euro area specifically, equity indices plummet, the dollar appreciates in a reversal-prone way over one to four quarters, corporate spreads widen on impact, and policy rates ease endogenously by about 30 basis points – so the local tightening of financial conditions “cannot be ascribed to a domestic monetary policy tightening.” The authors state the interpretive limit carefully: the floater result “challenges the degree of monetary policy sovereignty of open economies” and echoes Rey’s (2013) trilemma-to-dilemma claim, but “does not mean that exchange rate regimes do not matter,” and whether open-economy models with Value-at-Risk-type frictions can actually reproduce these regularities “still remains to be seen.”

Silvia Miranda-Agrippino | Macro Paper Warehouse

Patents, News, and Business Cycles

U.S. Monetary Policy and the Global Financial Cycle