EconPapers    
Economics at your fingertips  
 

What do we learn from Blanchard and Quah decompositions of output if aggregate demand may not be long-run neutral?

John Keating

Journal of Macroeconomics, 2013, vol. 38, issue PB, 203-217

Abstract: This paper structurally interprets empirical results obtained from Blanchard and Quah (1989) decompositions of output into permanent and transitory shocks. This is done based on assumptions about the qualitative responses of variables to structural shocks that are consistent with many different economic theories. Impulse responses of output to a permanent shock typically behave in a particular way before World War I that is unusual compared to post-World War II responses. Also, permanent shocks typically explain a larger share of output variance in that earlier period. We show these two empirical results support the hypothesis that a positive (negative) aggregate demand shock had a permanent positive (negative) effect on output in the pre-World War I period. Thus further support is obtained for that hypothesis based on more robust empirical findings and less restrictive structural assumptions. Another empirical result is that impulse responses from the data for post-World War II developed economies are typically qualitatively consistent with the effects of structural shocks from a standard textbook macro model. We show that Blanchard and Quah’s statistical model will obtain impulse responses that appear consistent with simple textbook theories as the parameter measuring aggregate demand’s long-run output effect is varied over a specific range. This analysis provides a range of non-neutralities for which results from Blanchard and Quah decompositions of output could be mistaken as structural.

Keywords: Vector autoregression; Identification assumptions; Permanent and transitory shocks to output; Moving average representations; Aggregate demand and supply model; Long-run non-neutrality (search for similar items in EconPapers)
JEL-codes: C32 C52 E3 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070413001171
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:38:y:2013:i:pb:p:203-217

DOI: 10.1016/j.jmacro.2013.07.007

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-08-22
Handle: RePEc:eee:jmacro:v:38:y:2013:i:pb:p:203-217