Christoph Görtz

News and financial intermediation in aggregate fluctuations

An important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks. Findings from estimated DSGE models that in theory allow news shocks to matter quantitatively suggest that they do not. This disconnect can be resolved once we augment a DSGE model with a financial channel that provides amplification to news shocks. Our results suggest that news shocks to the future growth prospects of the economy are significant drivers of U.S. fluctuations, explaining as much as 50% and 37% of the variance in hours worked and output, respectively, in cyclical frequencies.

Solving models with jump discontinuities in policy functions

We compare global methods for solving models with jump discontinuities in the policy function. We find that differences between value function iteration (VFI) and other methods are economically significant and Euler equation errors fail to be a sufficient measure of accuracy in such models. VFI fails to accurately identify both the location and size of jump discontinuities, while the endogenous grid method (EGM) and the finite element method (FEM) are much better at approximating this class of models. We further show that combining VFI with a local interpolation step (VFI†INT) is sufficient to obtain accurate approximations. The combination of computational speed, relatively easy implementation and adaptability make VFI†INT especially suitable for approximating models with jump discontinuities in policy functions: while EGM is the fastest method, it is relatively complex to implement; implementation of VFI†INT is relatively straightforward and it is much faster than FEM.