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Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model

Mario Forni () and Luca Gambetti ()

Center for Economic Research (RECent) from University of Modena and Reggio E., Dept. of Economics "Marco Biagi"

Abstract: We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian "cleansing" view of recessions.

Keywords: structural factor model; sign restrictions; monetary policy; fiscal policy; demand; supply (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-mac and nep-opm
Date: 2010-02
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Working Paper: Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model (2010) Downloads
Working Paper: Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model (2010) Downloads
Working Paper: Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model (2010) Downloads
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