THE DYNAMIC EFFECTS OF AGGREGATE DEMAND AND SUPPLY DISTURBANCES - ANOTHER LOOK

In a recent paper, Blanchard and Quah (American Economic Review, 1989, 79, 655-673) propose a set of restrictions to identify the structural innovations from a reduced-form bivariate model of income growth and unemployment. Given the assumptions made by Blanchard and Quah on the time-series properties of the data, this paper demonstrates that their bivariate model is just a special case of Stock and Watson's Journal of the American Statistical Association, 1988, 83, 1097-1107) common t rends representation. More importantly, this alternative representatio n allows the econometrician to test the long-run restrictions used by Blanchard and Quah to distinguish between demand and supply innovation s.