Working Paper: CEPR ID: DP4087
Authors: Gert Peersman
Abstract: This Paper uses a simple VAR for the industrialized world (aggregate of 17 countries), the US and the euro area to analyse the underlying shocks of the recent slowdown, i.e. supply, demand, monetary policy and oil price shocks. The results of two identification strategies are compared. One is based on traditional zero restrictions and, as an alternative, an identification scheme based on more recent sign restrictions is proposed. The main conclusion is that the recent slowdown is caused by a combination of several shocks: A negative aggregate supply and aggregate spending shock, the increase of oil prices in 1999, and restrictive monetary policy in 2000. These shocks are more pronounced in the US than the Euro area. The results are somewhat different depending on the identification strategy. It is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks.
Keywords: business cycles; vector autoregressions
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Negative aggregate supply and demand shocks (E00) | early millennium slowdown (E32) |
| Increase in oil prices in 1999 (Q31) | growth (O40) |
| Restrictive monetary policy in 2000 (E52) | economic downturn (F44) |
| Traditional zero restrictions (C29) | significance of oil price shocks (Q43) |
| Sign restrictions (C24) | role of monetary policy shocks (E52) |