EconPapers    
Economics at your fingertips  
 

Interpreting Permanent and Transitory Shocks to Output When Aggregate Demand May Not Be Neutral in the Long-run

John Keating

No 608, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: I examine the statistical model of permanent and transitory shocks to output under the following structural assumptions: An aggregate supply shock that raises output will cause the price level to fall and an aggregate demand shock that initially raises output will cause the price level to rise. No assumption is made about the long-run effect of aggregate demand on output. Based on these assumptions I obtain three primary results. First, if a permanent increase in output is associated with an increase in the price level, then aggregate demand shocks have a positive long-run effect on output. Second, the output variance explained by permanent shocks exceeds the variance attributable to aggregate supply when aggregate demand shocks have a positive effect on output in the long run. Third, permanent and transitory shocks will affect price and output in qualitatively the same way as aggregate supply and aggregate demand shocks, respectively, from textbook macro theory over a range of values for the structural parameter describing the long-run effect of aggregate demand on output. These results are used to explain and interpret empirical findings from the literature and to motivate directions for future research

Keywords: vector autoregression; identification restriction; permanent and transitory shocks; supply and demand shocks (search for similar items in EconPapers)
JEL-codes: C32 C52 E3 (search for similar items in EconPapers)
Date: 2004-08-11
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://repec.org/esNASM04/up.27895.1075650241.pdf (application/pdf)

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:ecm:nasm04:608

Access Statistics for this paper

More papers in Econometric Society 2004 North American Summer Meetings from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().

 
Page updated 2021-11-02
Handle: RePEc:ecm:nasm04:608