Trends and Cycles in the U.S. Economy

Abstract

This paper assesses the importance of aggregate demand and supply shocks in influencing economic activity in the United States. Aggregate supply shocks are modeled as exogenous shifts in labor supply and total factor productivity. Aggregate demand shocks arise either as a result of monetary factors or autonomous shifts in the components of spending. Compared with other studies using a similar methodology, the major finding is that aggregate demand shocks account for a substantial proportion of the unexplained variance of real GNP in the short run. Nevertheless, aggregate supply shocks also matter and become increasingly important as the forecast horizon is extended.

JEL Classification: 0230