AN APPLICATION OF ESTIMATING STRUCTURAL VECTOR AUTOREGRESSION MODELS WITH LONG-RUN RESTRICTIONS

This paper estimates the contribution of aggregate demand and supply s hocks to economic fluctuations. Following Blanchard and Quah we estima te a vector autoregression with long-run restrictions to identify stru ctural demand and supply shocks. We investigate the effects of tempora l aggregation on the contribution of these shocks to business cycle fl uctuations. Using the industrial production index which is a more cycl ically volatile measure of output than GNP, we find results qualitativ ely similar to theirs. Quantitatively, however, our results differ in that we find a larger fraction of output variation is explained by sup ply shocks and a larger fraction of unemployment variation is explaine d by demand shocks.