Long‐run neutrality of demand shocks: Revisiting Blanchard and Quah (1989) with independent structural shocks

Helmut Herwartz

Journal of Applied Econometrics, 2019, vol. 34, issue 5, 811-819

Abstract: With reference to a stylized theoretical macromodel, Blanchard and Quah (American Economic Review, 1989, 79, 655–673) identify empirical aggregate supply (e.g., productivity) and demand shocks by assuming that the latter are neutral for economic activity in the long run. Taking advantage of recent contributions to the structural VAR literature and data‐based identification, we find that effects of unique independent non‐Gaussian structural shocks support this assumption. Moreover, unlike the results in Blanchard and Quah, statistically identified supply shocks exhibit (insignificantly) opposite impacts on gross domestic product and unemployment in the short run. In comparison with benchmark results obtained under assumed long‐run neutrality, statistical identification points to a stronger role of aggregate supply shocks for shaping temporary profiles of US unemployment during the recessionary period 1973:Q3–1975:Q1.

Date: 2019
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