Effects of Idiosyncratic Shocks on Macroeconomic Time Series

26 Pages Posted: 16 Sep 2016

See all articles by Minxian Yang

Minxian Yang

UNSW Australia Business School, School of Economics

Date Written: June 03, 2016

Abstract

A factor structure for VAR model error terms is adopted to examine the dynamic relationships of major macroeconomic time series. The structure, which is testable, is used to trace the consequences of a contemporaneously “ceteris paribus” (or idiosyncratic) change in each variable in the VAR model. The impulse responses to idiosyncratic shocks are shown to be a dynamic representation of the Granger causality. In the analyses of the U.S. monthly data from 1954 to 2011 for four key variables, inflation is found to respond negatively (positively) to an increase in unemployment (the federal funds rate), holding other variables contemporaneously fixed. The real variables (output and unemployment) appear unresponsive to idiosyncratic changes in the nominal variables (the federal funds rate and inflation). A common factor is observed to have a positive effect on unemployment and negative effects on output, inflation and the federal funds rate.

Keywords: vector autoregression, error factor, identification, Granger causality, impulse responses, Phillips curve, monetary neutrality

JEL Classification: C32, E30

Suggested Citation

Yang, Minxian, Effects of Idiosyncratic Shocks on Macroeconomic Time Series (June 03, 2016). Available at SSRN: https://ssrn.com/abstract=2839653 or http://dx.doi.org/10.2139/ssrn.2839653

Minxian Yang (Contact Author)

UNSW Australia Business School, School of Economics ( email )

School of Economics
The University of New South Wales
Sydney, NSW NSW 2052
Australia
93853353 (Phone)

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