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The Structural Dynamics of US Output and Inflation: What Explains the Changes?

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  • Canova, Fabio
  • Gambetti, Luca
  • Pappa, Evi

Abstract

We examine the dynamics of US output and inflation using a structural time varying coefficient VAR. We show that there are changes in the volatility of both variables and in the persistence of inflation. Technology shocks explain changes in output volatility, while a combination of technology, demand and monetary shocks explain variations in the persistence and volatility of inflation. We detect changes over time in the transmission of technology shocks and in the variance of technology and of monetary policy shocks. Hours and labour productivity always increase in response to technology shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5879.

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Date of creation: Oct 2006
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Handle: RePEc:cpr:ceprdp:5879
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Keywords: persistence; structural time varying VARs; transmission; variability;

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Find related papers by JEL classification:
  • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
  • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Galí, Jordi & Rabanal, Pau, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Post-War US Data?," CEPR Discussion Papers 4522, C.E.P.R. Discussion Papers.
  2. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  3. Dedola, Luca & Neri, Stefano, 2006. "What does a technology shock do? A VAR analysis with model-based sign restrictions," Working Paper Series 0705, European Central Bank.
  4. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
  5. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," FRB Atlanta Working Paper 94-2, Federal Reserve Bank of Atlanta.
  6. Eric M. Leeper & Tao Zha, 1999. "Modest policy interventions," FRB Atlanta Working Paper 99-22, Federal Reserve Bank of Atlanta.
  7. Canova, Fabio & Gambetti, Luca, 2006. "Structural Changes in the US Economy: Bad Luck or Bad Policy?," CEPR Discussion Papers 5457, C.E.P.R. Discussion Papers.
  8. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
  9. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  10. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
  11. Luca Benati, 2004. "Evolving post-World War II UK economic performance," Bank of England working papers 232, Bank of England.
  12. Stefano Neri & Luca Dedola, 2004. "Are technology shocks contractionary? A Bayesian VAR analysis with priors on impulses responses," 2004 Meeting Papers 406, Society for Economic Dynamics.
  13. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05.
  14. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  15. Yongsung Chang & Frank Schorfheide, 2002. "Labor-Supply Shifts and Economic Fluctuations," Macroeconomics 0204005, EconWPA.
  16. G. Peersman & R. Straub, 2005. "Technology Shocks and Robust Sign Restrictions in a Euro Area SVAR," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/288, Ghent University, Faculty of Economics and Business Administration.
  17. Jean Boivin & Marc Giannoni, 2002. "Has monetary policy become less powerful?," Staff Reports 144, Federal Reserve Bank of New York.
  18. Evi Pappa, 2005. "New Keynesian or RBC Transmission? The Effects of Fiscal Policy in Labor Markets," Working Papers 293, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  19. Jordi Gali & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data?," NBER Working Papers 10636, National Bureau of Economic Research, Inc.
  20. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
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