News Driven Business Cycles and data on asset prices in estimated DSGE models

We demonstrate that inference from estimated structural News Driven Business Cycle (NDBC) models about the main drivers of fluctuations in macroeconomic variables and asset prices is sensitive to assumptions about the structure of the news shock processes. We show that, when data on asset prices are used in the estimation, a long-run news shock specification has a better fit than the short-run news shock specification which is prevalent the existing literature. The variance decompositions from the former model specification reveal that long-run news shocks are not the main drivers of macroeconomic variables, but do account for the majority of aggregate stock market fluctuations. (C) 2015 Elsevier Inc. All rights reserved.