A reconsideration of the failure of an S-shaped response of TFP to technological diffusion news

Abstract

We re-examine the empirical results on news shocks to total factor productivity (TFP) by identifying technological diffusion news that produces an S-shaped response of TFP. By revisiting Sims (2016), we show that Barsky and Sims’ (2011) result that TFP rises immediately following a favorable news shock, which is interpreted as a failure to identify diffusion news, is sensitive; even within Barsky and Sims’ identification framework, the identified news shock is found to produce an S-shaped response of TFP, as seen in Beaudry and Portier (2006). Furthermore, we show that VAR information content and measurement errors can play an important role in identifying technological diffusion news. We document that stock prices convey more valuable information about diffusion news than consumer confidence and that when the identification of news shocks is less affected by measurement error shocks to TFP, the identified news shock is likely to capture diffusion news.