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Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model

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  • Forni, Mario
  • Gambetti, Luca

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7692.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7692

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Keywords: demand; fiscal policy; monetary policy; sign restrictions; structural factor model; supply;

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Cited by:
  1. Mumtaz, Haroon & Zabczyk, Pawel & Ellis, Colin, 2011. "What lies beneath? A time-varying FAVAR model for the UK transmission mechanism," Working Paper Series, European Central Bank 1320, European Central Bank.
  2. Mario Forni & Marc Hallin & Marco Lippi & Paolo Zaffaroni, 2011. "One-Sided Representations of Generalized Dynamic Factor Models," DSS Empirical Economics and Econometrics Working Papers Series, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome 2011/5, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
  3. Baumeister, Christiane & Liu, Philip & Mumtaz, Haroon, 2013. "Changes in the effects of monetary policy on disaggregate price dynamics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(3), pages 543-560.
  4. Ángel Cuevas & Enrique Quilis, 2012. "A factor analysis for the Spanish economy," SERIEs, Spanish Economic Association, vol. 3(3), pages 311-338, September.
  5. Matteo Barigozzi & Antonio Conti & Matteo Luciani, 2012. "Do Euro area countries respond asymmetrically to the common monetary policy?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 43344, London School of Economics and Political Science, LSE Library.
  6. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2013. "Do euro area countries respond asymmetrically to the common monetary policy?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 923, Bank of Italy, Economic Research and International Relations Area.

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