Abstract
Working paper. Do news shocks explain business cycle fluctuations? A positive answer is provided by Beaudry, Portier (AER, 2006), who develop an identification strategy for "news shocks" in a vector error correction model (VECM) with TFP and Stock Prices on US data. Refining their analysis, we find evidence of a structural break in the long-run relationship between Stock Prices and TFP in 1980, at the beginning of the Volcker Era. In the second part of the paper we extend the sample period and analyse the news shock before and after 1980. Our results support the news view of the business cycle only after 1980. The news shock explains the majority (65 to 80 percent) of business cycle fluctuations of output, consumption and investment at any horizon and generates strong comovement among them. Moreover, TFP movements are well explained at medium and long-term horizons.