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Using Romer and Romer's new measure of monetary policy shocks to identify the AD and AS shocks

James Cover and Eric Olson ()

Applied Economics, 2013, vol. 45, issue 19, 2838-2846

Abstract: This article re-examines the series of (exogenous) Federal Funds Rate (FFR) shocks created by Romer and Romer (2004) for the period 1969:01--1996:12. We hypothesize that if Romer and Romer have constructed a reasonable set of monetary policy shocks, then including them in a small Vector Autoregression (VAR) should help to identify other structural shocks that affected the United States economy during their sample period. Using a sample period of 1971:01--1996:12 we are easily able to identify both an Aggregate Demand (AD) shock and an Aggregate Supply (AS) shock without imposing any sign or long-run restrictions. We present historical decompositions that allow us to compare the relative importance of these shocks with that of the exogenous monetary policy shocks in explaining output fluctuations during the 1973--1975, 1980--1984 and 1990--1991 business cycle episodes.

Date: 2013
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DOI: 10.1080/00036846.2012.681029

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