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Mr. Rabah Arezki, Valerie A Ramey, and Liugang Sheng

States. Since then, there has been a growing number of studies using various identification methods to explore the importance of so-called “news shocks” in driving business cycles. Most of the existing studies rely on structural vector autoregressive models (VAR) or on structural estimation of standard dynamic stochastic general equilibrium models. In open-economy macroeconomics, the intertemporal approach to the current account has sought to explain fluctuations in the current account as the optimal response to changing expectations of future output growth (e

Mr. Rabah Arezki, Valerie A Ramey, and Liugang Sheng
This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ? the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.