News about future technology are an important driver of business cycles, but they are unlikely to be the main driving force. This is according to an analysis of the information in patent applications for future technological innovations.
In research by Silvia Miranda-Agrippino, Sinem Hacioglu Hoke, Kristina Bluwstein, presented at the Royal Economic Society annual conference in April 2019, they examine the hypothesis that news about future productivity could generate business cycles — economic booms and busts — before the actual technological realisations.
The general hypothesis gives a central role to expectations: if news alone can set off an economic boom, lower than expected outcomes could set off a bust without any need for an actual change in the underlying economic condition that was the subject of news. Researchers focus in particular on news about future technology, because of the central role that technology has in many theoretical models of economic cycles.
For news to be a main driver of business cycles – where consistently – the research would need to show that news shocks cause main economic factors, such as output growth, hours worked and investment, all move in the same direction. They would also have to explain most of the variation in these variables.
Like many before them, the problem they face is that news about future technology are hard to measure. But by exploring the information in a new dataset of patent applications, and combining it with that in survey forecasts, the researchers believe they can solve the issue. Patents are a promise of potential future innovation, but may in principle depend also on other factors. Surveys, summarising expectations about the future formed prior to the publication of new patents, can help controlling for past news and other such confounding factors.
Their results support the idea that the arrival of news about future technological improvements triggers a sustained, although delayed, economic expansion. Output, consumption, investment and hours worked all rise robustly, and long before the technological innovation is introduced. Moreover, the news they measure can account for about a tenth of the changes in economic conditions.
Therefore, they conclude that news about future technology are an important driver of business cycles, but unlikely to be the main driving force.
'When Creativity Strikes: News Shocks and Business Cycle Fluctuations' by Silvia Miranda-Agrippino, Sinem Hacioglu Hoke, Kristina Bluwstein