An application of estimating structural vector autoregression models with long-run restrictions

This paper estimates the contribution of aggregate demand and supply shocks to economic fluctuations. Following Blanchard and Quah we estimate a vector autoregression with long-run restrictions to identify structural demand and supply shocks. We investigate the effects of temporal aggregation on the contribution of these shocks to business cycle fluctuations. Using the industrial production index which is a more cyclically volatile measure of output than GNP, we find results qualitatively similar to theirs. Quantitatively, however, our results differ in that we find a larger fraction of output variation is explained by supply shocks and a larger fraction of unemployment variation is explained by demand shocks.