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Sources of Output and Price Variability in a Macroeconometric Model

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  • Ray C. Fair

Abstract

There has been much recent discussion about the ultimate sources of macroeconomic variability. A number of authors attribute most of this variability to only a few sources, sometimes only one. Although there may be only a few important sources, this is far from obvious, since economies seem complicated. The purpose of this paper is to provide quantitative estimates of various sources of variability using my U.S. econometric model. Stochastic simulation is used to estimate how much the overall variances of real GNP and the GNP deflator are reduced when various shocks are suppressed in the model. The results show two main things. The first is that the contribution of a given shock to the variance can vary considerably as the length ahead of the prediction varies. What is important for the one-quarter-ahead prediction may not be important for the eight-quarter-ahead prediction, and vice versa. The second is that the results imply that there are many important sources of variability for real GNP. It is not the case that one or two sources dominate. This is less true for the GNP deflator, however, where there are two very important sources, shocks to the price and wage equations and shocks to the price of imports, and one moderately important one, shocks to the government exogenous variables.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2112.

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Date of creation: Dec 1986
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Publication status: published as "Sources of Economic Fluctuations in the United States." From The Quarterly Journal of Economics, Vol. CIII, No. 2, pp. 313-332, (May 1988).
Handle: RePEc:nbr:nberwo:2112

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  1. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
  2. Robert E. Hall, 1986. "The Role of Consumption in Economic Fluctuations," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 237-266 National Bureau of Economic Research, Inc.
  3. Robert J. Shiller, 1987. "Ultimate Sources of Aggregate Variability," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 816, Cowles Foundation for Research in Economics, Yale University.
  4. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers, Queen's University, Department of Economics 234, Queen's University, Department of Economics.
  5. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 228-48, April.
  6. Ray C. Fair, 1984. "The Use of Expected Future Variables in Macroeconometric Models," NBER Working Papers 1445, National Bureau of Economic Research, Inc.
  7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  8. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
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