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 five. Focusing on the four-shock specification, we identify, using sign restrictions, two policy shocks, monetary and fiscal, and two non-policy shocks, demand and supply. 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) Monetary and fiscal policy shocks have sizable effects on output and prices, with no evidence of crowding-out of private aggregate demand components; 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.

Policy and Business Cycle Shocks: A Structural Factor Model Representation of the US Economy / Forni, M; Gambetti, L. - In: JOURNAL OF RISK AND FINANCIAL MANAGEMENT. - ISSN 1911-8074. - 14:8(2021), pp. 1-21. [10.3390/jrfm14080371]

Policy and Business Cycle Shocks: A Structural Factor Model Representation of the US Economy

Forni, M;Gambetti, L
2021

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 five. Focusing on the four-shock specification, we identify, using sign restrictions, two policy shocks, monetary and fiscal, and two non-policy shocks, demand and supply. 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) Monetary and fiscal policy shocks have sizable effects on output and prices, with no evidence of crowding-out of private aggregate demand components; 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.
2021
14
8
1
21
Policy and Business Cycle Shocks: A Structural Factor Model Representation of the US Economy / Forni, M; Gambetti, L. - In: JOURNAL OF RISK AND FINANCIAL MANAGEMENT. - ISSN 1911-8074. - 14:8(2021), pp. 1-21. [10.3390/jrfm14080371]
Forni, M; Gambetti, L
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/1274388
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