Demand and Supply Shocks in the IS-LM Model: Empirical Findings for Five Countries
AbstractThis paper analyzes whether the short-run behavior of output, the interest rate, and the price level in the U.S., Germany, France, the U.K., and Italy follows the qualitative predictions of the IS-LM model augmented by a long-run aggregate supply schedule. The use of the structural vector autoregression methodology allows to identify three different shocks under the long-run neutrality assumptions implied by the vertical aggregate supply curve. An impulse response analysis shows that, for all countries considered, the dynamic adjustment of the variables in response to supply, monetary, and fiscal shocks is consistent with the considered version of the IS-LM model. In addition, the variance decompositions show that demand shocks explain a substantial part of output fluctuations at short horizons. This result stands in contrast to simple Real Business Cycle models that explain business cycles exclusively in terms of productivity shocks.
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Bibliographic InfoArticle provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.
Volume (Year): 218 (1999)
Issue (Month): 5+6 (May)
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structural vector autoregression; demand and supply shocks; business cycles;
Other versions of this item:
- Thomas J. Jordan & Carlos Lenz, 1994. "Demand and Supply Shocks in the IS-LM Model: Empirical Findings for five Countries," Diskussionsschriften dp9408, Universitaet Bern, Departement Volkswirtschaft.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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- Funke, Michael, 1997. "How important are demand and supply shocks in explaining German business cycles?: New evidence on an old debate," Economic Modelling, Elsevier, vol. 14(1), pages 11-37, January.
- Jörg Döpke, 2000. "Macroeconomic Forecasts and the Nature of Economic Shocks in Germany," Kiel Working Papers 972, Kiel Institute for the World Economy.
- Dopke, Jorg, 2001. "Macroeconomic forecasts and the nature of economic shocks in Germany," International Journal of Forecasting, Elsevier, vol. 17(2), pages 181-201.
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