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Long‐run neutrality of demand shocks: Revisiting Blanchard and Quah (1989) with independent structural shocks*

* This paper is a replication of an original study

Author

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  • Helmut Herwartz

Abstract

With reference to a stylized theoretical macromodel, Blanchard and Quah (American Economic Review, 1989, 79, 655–673) identify empirical aggregate supply (e.g., productivity) and demand shocks by assuming that the latter are neutral for economic activity in the long run. Taking advantage of recent contributions to the structural VAR literature and data‐based identification, we find that effects of unique independent non‐Gaussian structural shocks support this assumption. Moreover, unlike the results in Blanchard and Quah, statistically identified supply shocks exhibit (insignificantly) opposite impacts on gross domestic product and unemployment in the short run. In comparison with benchmark results obtained under assumed long‐run neutrality, statistical identification points to a stronger role of aggregate supply shocks for shaping temporary profiles of US unemployment during the recessionary period 1973:Q3–1975:Q1.

Suggested Citation

  • Helmut Herwartz, 2019. "Long‐run neutrality of demand shocks: Revisiting Blanchard and Quah (1989) with independent structural shocks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(5), pages 811-819, August.
    • Handle: RePEc:wly:japmet:v:34:y:2019:i:5:p:811-819
    DOI: 10.1002/jae.2675
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    Citations

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    Cited by:

    1. Moneta, Alessio & Pallante, Gianluca, 2022. "Identification of Structural VAR Models via Independent Component Analysis: A Performance Evaluation Study," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    2. Drautzburg, Thorsten & Wright, Jonathan H., 2023. "Refining set-identification in VARs through independence," Journal of Econometrics, Elsevier, vol. 235(2), pages 1827-1847.
    3. Fiorentini, Gabriele & Sentana, Enrique, 2023. "Discrete mixtures of normals pseudo maximum likelihood estimators of structural vector autoregressions," Journal of Econometrics, Elsevier, vol. 235(2), pages 643-665.

    Replication

    This item is a replication of:
  • Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.

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