Two main business cycle shocks are better than one

A recent influential study based on a Structural VAR with frequency-domain identification argues that most cyclical fluctuations in real activity are driven by a single shock. We revisit this view using a large-dimensional Dynamic Factor Model estimated on more than 100 U.S. macroeconomic series. Our data-rich approach uncovers two main shocks that jointly drive the business cycle: one transitory and demand-like, the other persistent and supply-like. This two-shock structure explains the bulk of both business-cycle and long-run fluctuations in key macroeconomic aggregates. The findings support a classical AD-AS interpretation and challenge the notion of a single dominant business-cycle shock.