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Puzzling Comovements between Output and Interest Rates? Multiple Shocks are the Answer

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Author Info
Elmar Mertens () (Study Center Gerzensee and University of Lausanne)

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Abstract

Stylized facts on output and interest rates in the U.S. have so far proved hard to match with business cycle models. But these ¯ndings do not acknowledge that the economy might well be driven by di®erent shocks, and by each in di®erent ways. I estimate covariances of output, nominal and real interest rate conditional on three types of shocks: Technology, monetary policy and sources of in°ation persistence. Conditional and technology and monetary policy, the results square with standard models. However these two shocks explain only about 50% of persistent movements in in°ation which are key for understanding the overall comovements. The puzzle lies in modeling the shocks and transmission channels behind in°ation persistence, not in standard transmission channels for technology and monetary policy errors.

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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 05.05.

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Length: 47 pages
Date of creation: Mar 2005
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Handle: RePEc:szg:worpap:0505

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