Patents, News, and Business Cycles

Abstract We exploit information in patent applications to construct an instrumental variable for the identification of technology news shocks that relaxes all the identifying assumptions traditionally used in the literature. The instrument recovers news shocks that have no effect on aggregate productivity in the short-run, but are a significant driver of its trend component. The shock prompts a broad-based expansion in anticipation of the future increase in total factor productivity (TFP), with output, consumption, and investment all rising well before any material increase in TFP is recorded. Despite the positive conditional comovements, the shock only accounts for a modest share of fluctuations of macroeconomic aggregates at business cycle frequencies. Financial markets price-in news shocks on impact, while most of the macro aggregates respond with some delay.