Working Paper: CEPR ID: DP2028
Authors: Fabio Canova; Gianni De Nicolò
Abstract: This paper examines the question of which shock generates cyclical movements in output and inflation using an alternative approach. We find that in the G-7 countries output cycles are driven by different structural disturbances, that monetary disturbances play a significant role in at least four of the seven countries and that the dominant cause of output innovations within countries has changed after 1982. Inflation cycles are much more homogeneous across countries and are driven by a combination of supply and monetary disturbances. The disturbances we have identified explain large portions of output and inflation cycles, but are not a major cause of fluctuations in financial and money markets. The theoretical and policy implications of the findings are discussed.
Keywords: structural shocks; business cycles; monetary models; dynamic correlations
JEL Codes: C68; E32; F11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive temporary innovations in output due to supply disturbances (O49) | negative transitory responses in inflation (E31) |
| positive temporary innovations in output due to real demand disturbances (O49) | positive transitory responses in inflation (E31) |
| monetary disturbances (E39) | output innovations in Canada, Germany, United Kingdom, and France (O51) |
| real demand disturbances (R22) | output innovations in Japan (O39) |
| supply, technology, and monetary disturbances (E39) | output innovations in Italy and the United States (O39) |
| supply and monetary disturbances (E39) | inflation innovations (E31) |
| monetary disturbances (E39) | output cycles in at least four of the seven countries (O57) |