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News Shocks and the External Finance Premium

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  • Guo Shen

    (Central University of Finance and Economics)

Abstract

US data show that the external finance premium, measured by the high yield bond spread, moves countercyclically and leads movements in output by four quarters. This paper constructs a model with nominal rigidities and financial accelerator to explain this observation. The key finding of this paper is: it is agents' reaction on news about future technology changes that generates the observed countercyclical movement and lead-lag pattern of the external finance premium, while a contemporary technology shock generates a procyclical movement of the external finance premium. The variance decomposition based on the estimated model demonstrates that news shocks account for about 72% of fluctuations in the external finance premium.

Suggested Citation

  • Guo Shen, 2011. "News Shocks and the External Finance Premium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-27, December.
    • Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:40
    DOI: 10.2202/1935-1690.2291
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    Cited by:

    1. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.

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