Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This paper assesses the significance of quality-of-capital (QoC) news shocks and their transmission through the credit channel in explaining aggregate fluctuations. Our framework is an estimated medium-scale DSGE model augmented with a financial sector where two alternative sources of news shocks are considered. One is a (standard) total-factor-productivity (TFP) news shock; the other is a QoC news shock. The latter has a clear meaning that enables a close link to be built up between financial markets and the macroeconomy through the credit and expectation channels, which greatly improves model fit and largely displaces TFP news shocks as a source of the business cycle. The significance of pure (rather than realized) news underscores the role of expectations.