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Structural shocks and the comovements between output and interest rates

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  • Mertens, Elmar

Abstract

Stylized facts on U.S. output and interest rates have so far proved hard to match with simple DSGE models. I estimate covariances between output, nominal and real interest rate conditional on structural shocks, since such evidence has largely been lacking in previous discussions of the output-interest rate puzzle. Conditional on shocks to technology and monetary policy, the results square with simple models. Moreover, permanent inflation shocks accounted for the counter-cyclical and inversely leading behavior of the real rate during the Great Inflation (1959-1979). Over the Great Moderation (1982-2006), technology shocks were more dominant and the real rate has been pro-cyclical.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 6 (June)
Pages: 1171-1186

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:6:p:1171-1186

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Interest rates Business cycles Bandpass filter Structural VAR News shocks;

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Cited by:
  1. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.

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