The Role of Global Shocks in Explaining US Output and Real Exchange Rate: Evidence From Unfiltered Data

37 Pages Posted: 22 Jan 2016 Last revised: 16 Feb 2020

See all articles by David Meenagh

David Meenagh

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Olayinka Oyekola

University of Exeter INTO

Date Written: September 20, 2015

Abstract

We investigate the role of global shocks in the determination of US business cycle fluctuations, with a particular focus on their relative contribution to explaining the dynamics of output and real exchange rate. To this end, we develop a two-sector open economy dynamic stochastic general equilibrium (DSGE) model with oil demand that, in addition to global shocks, also incorporates productivity, mark-up and demand shocks. Using unfiltered data, this model is estimated within an indirect inference (II) framework. Our findings reveal that global shocks are among the chief drivers of movements in many US macroeconomic aggregates, including output and the real exchange rate between 1949 and 2013. Consequently, we establish that productivity, mark-up and demand shocks alone cannot sufficiently account for the observed volatilities in the variables of interest.

JEL Classification: E32, D58, F41, C52, Q43

Suggested Citation

Meenagh, David and Minford, Patrick and Oyekola, Olayinka, The Role of Global Shocks in Explaining US Output and Real Exchange Rate: Evidence From Unfiltered Data (September 20, 2015). USAEE Working Paper No. 16-228, Available at SSRN: https://ssrn.com/abstract=2719347 or http://dx.doi.org/10.2139/ssrn.2719347

David Meenagh

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5198 (Phone)
+44 29 2087 4419 (Fax)

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Olayinka Oyekola (Contact Author)

University of Exeter INTO ( email )

Stocker Rd
Exeter, EX4 4PY
United Kingdom

HOME PAGE: http://www.olayinkaoyekola.com

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