Interaction between structural and cyclical shocks in production and employment

A major aim of recent empirical modelling of the business cycle is to ident ify the relative importance of aggregate supply and demand shocks. This pap er uses the methodology of unobserved (or structural) components time serie s models for the identification of technology and demand shocks in a two-eq uation system of structural labour productivity and industrial output. It a llows us to introduce the correlation between the structural and cyclical s hocks such that the mutual dependency of these shocks can be estimated expl icitly. The data is quarterly time series of labour productivity in industr y and industrial output for Germany, the Netherlands, the United Kingdom an d the United States. Our results show that the covariance of the dynamics o f structural and cyclical shocks appears to be important in these countries .