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

49 Pages Posted: 1 Mar 2010

See all articles by Mario Forni

Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB)

Date Written: February 2010

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: demand, fiscal policy, monetary policy, sign restrictions, structural factor model, supply

JEL Classification: C32, E32, E52, F31

Suggested Citation

Forni, Mario and Gambetti, Luca, Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model (February 2010). CEPR Discussion Paper No. DP7692, Available at SSRN: https://ssrn.com/abstract=1559648

Mario Forni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy
+39 059 205 6852 (Phone)
+39 059 205 6947 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

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