The Time Varying Effects of Permanent and Transitory Shocks to Real Output
Annual changes in volatility of U.S. real output growth and inflation are documented in data from 1870 to 2009 using a time varying parameter VAR model. Both volatilities rise quickly with World War I and its aftermath, stay relatively high until the end of World War II and drop rapidly until the mid to late-1960s. This Postwar Moderation represents the largest decline in volatilities in our sample, much greater than the Great Moderation that began in the 1980s. Fluctuations in output growth volatility are primarily associated with permanent shocks to output while fluctuations in inflation volatility are primarily accounted for by temporary shocks to output. Conditioning on temporary shocks, inflation and output growth are positively correlated. This finding and the ensuing impulse responses are consistent with an aggregate demand interpretation for the temporary shocks. Our model suggests aggregate demand played a key role in the changes in inflation volatility. Conversely, the two variables are negatively correlated when conditioning on permanent shocks, suggesting that these disturbances are associated primarily with aggregate supply. Our results suggest that aggregate supply played an important role in output volatility fluctuations. Most of the impulse responses support an aggregate supply interpretation of permanent shocks. However, for the pre-World War I period, we find that at longer horizons a permanent increase in output is generally associated with an increase in the price level that is frequently statistically significant. This evidence suggests aggregate demand may have had a long-run positive effect on output during the pre-World War I period.
|Date of creation:||Feb 2012|
|Contact details of provider:|| Postal: 415 Snow Hall, Lawrence, KS 66045|
Phone: (785) 864-3501
Fax: (785) 864-5270
Web page: http://www2.ku.edu/~kuwpaper/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Clark, Todd E. & Davig, Troy, 2011.
"Decomposing the declining volatility of long-term inflation expectations,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(7), pages 981-999, July.
- Todd E. Clark & Troy A. Davig, 2009. "Decomposing the declining volatility of long-term inflation expectations," Research Working Paper RWP 09-05, Federal Reserve Bank of Kansas City.
- Nason James M. & Smith Gregor W, 2008. "Great Moderation(s) and US Interest Rates: Unconditional Evidence," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-33, November.
- James M. Nason & Gregor W. Smith, 2007. "Great Moderation(s) and U.S. Interest Rates: Unconditional Evidence," Working Papers 1140, Queen's University, Department of Economics.
- James M. Nason & Gregor W. Smith, 2008. "Great moderations and U.S. interest rates: unconditional evidence," FRB Atlanta Working Paper 2008-01, Federal Reserve Bank of Atlanta.
- Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
- Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- Jordi Galí & Luca Gambetti, 2006. "On the sources of the Great Moderation," Economics Working Papers 1041, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2007.
- Jordi Gali & Luca Gambetti, 2008. "On the Sources of the Great Moderation," NBER Working Papers 14171, National Bureau of Economic Research, Inc.
- Galí, Jordi & Gambetti, Luca, 2008. "On the Sources of the Great Moderation," CEPR Discussion Papers 6632, C.E.P.R. Discussion Papers.
- Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-353, July.
- 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.
- Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
- Keating, John & Valcarcel, Victor, 2012. "Greater moderations," Economics Letters, Elsevier, vol. 115(2), pages 168-171.
- John W. Keating & Victor J. Valcarcel, 2012. "Greater Moderations," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201202, University of Kansas, Department of Economics.
- Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32. Full references (including those not matched with items on IDEAS)