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Demand and Supply Shocks in the IS-LM Model: Empirical Findings for five Countries

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  • Thomas J. Jordan
  • Carlos Lenz

Abstract

This 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 Info

Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp9408.

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Date of creation: Jul 1994
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Handle: RePEc:ube:dpvwib:dp9408

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Cited by:
  1. Jörg Döpke, 2000. "Macroeconomic Forecasts and the Nature of Economic Shocks in Germany," Kiel Working Papers 972, Kiel Institute for the World Economy.
  2. 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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