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The Time-Varying Effects Of Permanent And Transitory Shocks To Real Output

Author

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  • Keating, John W.
  • Valcarcel, Victor J.

Abstract

A time-varying-parameter VAR for real output growth and inflation is estimated with annual U.S. series dating back to 1870. Volatility for both variables rises quickly with World War I and its aftermath, stays high until the end of World War II, and drops rapidly until the 1960s. This Postwar Moderation yields the largest decline in volatilities, surpassing the Great Moderation. Conditional on temporary shocks, inflation and output growth are positively correlated. Our model implies that aggregate demand played a key role in inflation volatility fluctuations. Conversely, the two variables are negatively correlated conditional on permanent shocks. Our model suggests that aggregate supply played an important role in output volatility fluctuations. Most impulse responses support an aggregate supply interpretation for permanent shocks. However, before World War I, a permanent increase in output raised the price level at longer horizons, and these responses are frequently statistically significant. This evidence supports the hypothesis that aggregate demand had a long-run positive effect on output during the pre–World War I period.

Suggested Citation

  • Keating, John W. & Valcarcel, Victor J., 2015. "The Time-Varying Effects Of Permanent And Transitory Shocks To Real Output," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 477-507, April.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:03:p:477-507_00
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    Cited by:

    1. Keating, John W. & Valcarcel, Victor J., 2017. "What's so great about the Great Moderation?," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 115-142.
    2. Ndou, Eliphas & Gumata, Nombulelo, 2024. "Should the South African Reserve Bank lower the inflation target band? Insights from the GDP-inflation nexus," Journal of Policy Modeling, Elsevier, vol. 46(3), pages 638-654.
    3. Marieh Azizirad, 2022. "Fisher vs Keynes: Does an Interest Rate Hike Cause Inflation to Increase or Decrease?," Discussion Papers dp22-08, Department of Economics, Simon Fraser University.
    4. Chen, Anping & Groenewold, Nicolaas, 2019. "China's ‘New Normal’: Is the growth slowdown demand- or supply-driven?," China Economic Review, Elsevier, vol. 58(C).
    5. Tian, Shuairu & Hamori, Shigeyuki, 2016. "Time-varying price shock transmission and volatility spillover in foreign exchange, bond, equity, and commodity markets: Evidence from the United States," The North American Journal of Economics and Finance, Elsevier, vol. 38(C), pages 163-171.
    6. Guglielmo Maria Caporale & Gloria Claudio-Quiroga & Luis Alberiko Gil-Alana, 2022. "The relationship between prices and output in the UK and the US," SN Business & Economics, Springer, vol. 2(6), pages 1-13, June.
    7. Granados, Camilo & Parra-Amado, Daniel, 2024. "Estimating the output gap after COVID: How to address unprecedented macroeconomic variations," Economic Modelling, Elsevier, vol. 135(C).
    8. Johannes W. Fedderke, 2022. "Identifying supply and demand shocks in the South African Economy, 1960–2020," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 349-389, September.
    9. Semih Emre Çekin & Victor J. Valcarcel, 2020. "Inflation volatility and inflation in the wake of the great recession," Empirical Economics, Springer, vol. 59(4), pages 1997-2015, October.
    10. Zhang, Weiping & Zhuang, Xintian & Lu, Yang & Wang, Jian, 2020. "Spatial linkage of volatility spillovers and its explanation across G20 stock markets: A network framework," International Review of Financial Analysis, Elsevier, vol. 71(C).
    11. Zhang, Weiping & Zhuang, Xintian & Lu, Yang, 2020. "Spatial spillover effects and risk contagion around G20 stock markets based on volatility network," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    12. Valcarcel, Victor J. & Wohar, Mark E., 2013. "Changes in the oil price-inflation pass-through," Journal of Economics and Business, Elsevier, vol. 68(C), pages 24-42.
    13. John W. Keating & Victor J. Valcarcel, 2012. "What's so Great about the Great Moderation? A Multi-Country Investigation of Time-Varying Volatilities of Output Growth and Inflation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201204, University of Kansas, Department of Economics.
    14. Jansson, Walter, 2018. "Stock markets, banks and economic growth in the UK, 1850–1913," Financial History Review, Cambridge University Press, vol. 25(3), pages 263-296, December.
    15. Valcarcel, Victor J., 2012. "The dynamic adjustments of stock prices to inflation disturbances," Journal of Economics and Business, Elsevier, vol. 64(2), pages 117-144.
    16. Antonakakis, Nikolaos & Gupta, Rangan & Tiwari, Aviral K., 2017. "The time-varying correlation between output and prices in the United States over the period 1800–2014," Economic Systems, Elsevier, vol. 41(1), pages 98-108.
    17. Liu, Xueyong & An, Haizhong & Li, Huajiao & Chen, Zhihua & Feng, Sida & Wen, Shaobo, 2017. "Features of spillover networks in international financial markets: Evidence from the G20 countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 265-278.
    18. Keating, John & Valcarcel, Victor, 2012. "Greater moderations," Economics Letters, Elsevier, vol. 115(2), pages 168-171.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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