Sources of Business Cycle Fluctuations

Matthew Shapiro and Mark Watson

No 870, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: What shocks account for the business cycle frequency and long run movements of output and prices? This paper addresses this question using the identifying assumption that only supply shocks, such as shocks to technology, oil prices, and labor supply affect output in the long run. Real and monetary aggregate demand shocks can affect output, but only in the short run. This assumption sufficiently restricts the reduced form of key macroeconomic variables to allow estimation of the shocks and their effect on output and price at all frequencies. Aggregate demand shocks account for about twenty to thirty percent of output fluctuations at business cycle frequencies. Technological shocks account for about one-quarter of cyclical fluctuations, and about one-third of output's variance at low frequencies. Shocks to oil prices are important in explaining episodes in the 1970's and 1980's. Shocks that permanently affect labor output account for the balance of fluctuations in output, namely, about half of its variance at all frequencies.

Keywords: Business cycle; supply shocks; inflation; output; demand shocks (search for similar items in EconPapers)
Pages: 61 pages
Date: 1988-04
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Citations: View citations in EconPapers (413)

Published in NBER Macroeconomics Annual (1988), 3: 111-148

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Chapter: Sources of Business Cycle Fluctuations (1988)
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