The Demand Origins of Business Cycles

Christian Matthes and Felipe Schwartzman

No 1122, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We use economic theory to rank the impact of structural shocks across sectors. This ranking helps us to identify the origins of U.S. business cycles. To do this, we introduce a Hierarchical Vector Auto-Regressive (Hi-VAR) model, encompassing aggregate and sectoral variables. We find that shocks whose impact originate in the “demand” side (monetary, household and government consumption) account for 2.4 times more of the variance of U.S. GDP growth at business cycle frequencies then identified shocks originating in the “supply” side (technology and energy). Furthermore, corporate financial shocks, which theory suggests propagate to large extent through demand channels, account for 1.4 times as much as those same supply shocks.

Date: 2019
New Economics Papers: this item is included in nep-mac
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