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Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model

  • Mario Forni

    ()

  • Luca Gambetti

    ()

We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian "cleansing" view of recessions.

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File URL: http://www.recent.unimore.it/wp/RECent-wp40.pdf
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Paper provided by University of Modena and Reggio E., Dept. of Economics "Marco Biagi" in its series Center for Economic Research (RECent) with number 040.

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Length: pages 46
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:mod:recent:040
Contact details of provider: Web page: http://www.recent.unimore.it/

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  17. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September.
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