Working Paper: CEPR ID: DP18070
Authors: Mario Forni; Luca Gambetti; Antonio Granese; Luca Sala; Stefano Soccorsi
Abstract: We provide a few new empirical facts that any theoretical model of the US macroeconomy should feature in order to be consistent with the data. 1) There are two classes of shocks: demand and supply. Supply shocks have long-run effects on economic activity, demand shocks do not. 2) Both supply and demand shocks are important sources of business cycles fluctuations. 3) Supply shocks are the primary driver for consumption fluctuations, demand shocks for investment. 4) The demand shock is closely related to the credit spread, while the supply shock is essentially a news technology shock. The results are obtained using a novel frequency domain method to identify demand and supply shock.
Keywords: business cycle; frequency domain; structural dynamic factor models
JEL Codes: E32; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supply shocks (E39) | economic activity (E20) |
| demand shocks (E39) | investment fluctuations (G31) |
| supply shocks (E39) | consumption fluctuations (E20) |
| demand shock (E00) | output (C67) |
| demand shock (E00) | unemployment (J64) |
| supply shock (E65) | long-run economic activity (R11) |
| demand shock (E00) | cyclical variance in output (E32) |
| demand shock (E00) | cyclical variance in inflation (E31) |
| demand shock (E00) | transitory effects on real economic activity (E32) |