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Two's not company: mis-aggregation and "supply-induced" unemployment increases

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  • Hoffmaister, Alexander W.

Abstract

The seminal work by Blanchard and Quah (1989) identifying long-run shocks finds that the unemployment rate increases following a “supply” shock. This puzzling result engenders a lively debate between leading schools of macroeconomic thought. But should we employ this model to study macroeconomic fluctuations? Faust and Leeper (1997) warn that the model is not reliable for structural inference, nor is the related Bayoumi and Eichengreen (1993) model. In this paper, I revisit the disputed result from the viewpoint of IRF’s bias. Using a novel methodology to parse the sources of IRF’s bias, I find that “supply-induced” unemployment increases reflect mis-aggregation of technology and labor-supply shocks.

Suggested Citation

  • Hoffmaister, Alexander W., 2022. "Two's not company: mis-aggregation and "supply-induced" unemployment increases," MPRA Paper 115513, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115513
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    File URL: https://mpra.ub.uni-muenchen.de/116954/1/MPRA_paper_116954.pdf
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    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Macroeconomic Adjustment under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Economic Journal, Royal Economic Society, vol. 104(425), pages 813-827, July.
    3. Binet, Marie-Estelle & Pentecôte, Jean-Sébastien, 2015. "Macroeconomic idiosyncrasies and European monetary unification: A sceptical long run view," Economic Modelling, Elsevier, vol. 51(C), pages 412-423.
    4. Bayoumi, Tamim & Eichengreen, Barry, 2020. "Aftershocks of monetary unification: Hysteresis with a financial twist," Journal of Banking & Finance, Elsevier, vol. 113(C).
    5. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1013-1025, November.
    6. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-1357, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    vector autoregression; permanent and temporary shocks to output; missing-variables; fundamentalness; mis-aggregated shocks; co-mingled shocks; impulse response function bias; moving-average representation; aggregate demand and supply shocks; long-run neutrality; labor-supply shocks; contractionary technology shocks;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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