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On the long-run neutrality of demand shocks

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  • Chen, Wenjuan
  • Netsunajev, Aleksei

Abstract

Long run neutrality restrictions have been widely used to identify structural shocks in VAR models. This paper revisits the seminal paper by Blanchard and Quah (1989), and investigates their identification scheme. We use structural VAR models with smoothly changing covariances for identification of shocks. The resulted impulse responses are economically meaningful. Formal test results reject the long-run neutrality of demand shocks.

Suggested Citation

  • Chen, Wenjuan & Netsunajev, Aleksei, 2015. "On the long-run neutrality of demand shocks," SFB 649 Discussion Papers 2015-043, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2015-043
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Markku Lanne & Helmut Lütkepohl, 2008. "Identifying Monetary Policy Shocks via Changes in Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1131-1149, September.
    3. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
    4. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    5. Dornbusch, Rudiger & Frenkel, Jacob A, 1973. "Inflation and Growth: Alternative Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 141-156, Part I Fe.
    6. repec:diw:diwwpp:dp1388 is not listed on IDEAS
    7. Francis, Neville & Ramey, Valerie A., 2005. "Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1379-1399, November.
    8. John W. Keating, 2013. "What Do We Learn from Blanchard and Quah Decompositions If Aggregate Demand May Not be Long-Run Neutral?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201302, University of Kansas, Department of Economics.
    9. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    10. Emanuele Bacchiocchi & Luca Fanelli, 2015. "Identification in Structural Vector Autoregressive Models with Structural Changes, with an Application to US Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(6), pages 761-779, December.
    11. Lütkepohl, Helmut & Netésunajev, Aleksei, 2014. "Structural vector autoregressions with smooth transition in variances: The interaction between US monetary policy and the stock market," SFB 649 Discussion Papers 2014-031, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    12. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    13. Keating, John W., 2013. "What do we learn from Blanchard and Quah decompositions of output if aggregate demand may not be long-run neutral?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 203-217.
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    Cited by:

    1. Nautz, Dieter & Strohsal, Till & Netšunajev, Aleksei, 2019. "The Anchoring Of Inflation Expectations In The Short And In The Long Run," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1959-1977, July.
    2. Lütkepohl, Helmut & Netšunajev, Aleksei, 2017. "Structural vector autoregressions with heteroskedasticity: A review of different volatility models," Econometrics and Statistics, Elsevier, vol. 1(C), pages 2-18.
    3. Helmut Lütkepohl & Mika Meitz & Aleksei Netšunajev & Pentti Saikkonen, 2021. "Testing identification via heteroskedasticity in structural vector autoregressive models," The Econometrics Journal, Royal Economic Society, vol. 24(1), pages 1-22.
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    5. Ngomba Bodi, Francis Ghislain, 2018. "Contributions relatives des chocs de demande agrégée et d’offre agrégée aux fluctuations de la croissance réelle en zone CEMAC [Relative contributions of aggregate demand and supply shocks to busin," MPRA Paper 116376, University Library of Munich, Germany.

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    More about this item

    Keywords

    smooth transition VAR models; identification via heteroskedasticity; long-run neutrality; aggregate demand; aggregate supply;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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