No News in Business Cycles

A structural Factor-Augmented VAR model is used to evaluate the role of "news" shocks in generating the business cycle. We find that (i) existing small-scale VAR models are affected by "non-fundamentalness" and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a smaller role in explaining the business cycle than previously found in the literature; (iii) their effects are essentially in line with what predicted by standard theories; (iv) a substantial fraction of business cycle fluctuations are explained by shocks unrelated to technology. JEL classification: C32, E32, E62. Keywords: Factor-augmented VAR, news shocks, invertibility, fundamentalness.