Working Paper: CEPR ID: DP7692
Authors: Mario Forni; Luca Gambetti
Abstract: We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding-out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian ``cleansing'' view of recessions.
Keywords: demand; fiscal policy; monetary policy; sign restrictions; structural factor model; supply
JEL Codes: C32; E32; E52; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supply shocks (E39) | prices (P22) |
| demand shocks (E39) | prices (P22) |
| supply shocks (E39) | GDP (E20) |
| demand shocks (E39) | employment (J68) |
| demand shocks (E39) | inflation (E31) |
| monetary policy shocks (E39) | output (C67) |
| monetary policy shocks (E39) | prices (P22) |
| fiscal policy shocks (E62) | output (C67) |
| fiscal policy shocks (E62) | prices (P22) |
| negative demand shocks (E31) | productivity (O49) |