Sources of Business Cycle Fluctuations

Matthew D. Shapiro and Mark Watson

No 2589, NBER Working Papers from National Bureau of Economic Research, Inc

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 input account for the balance of fluctuations in output, namely, about half of its variance at all frequencies.

Date: 1988-05
Note: EFG
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Published as Fischer, Stanley (ed.) NBER Macroeconomics Annual 1988, Vol. 3. Cambridge, MA: The MIT Press, 1988.
Published as Sources of Business Cycle Fluctuations , Matthew D. Shapiro, Mark W. Watson. in NBER Macroeconomics Annual 1988, Volume 3 , Fischer. 1988

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Chapter: Sources of Business Cycle Fluctuations (1988)
Working Paper: Sources of Business Cycle Fluctuations (1988)
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