Chapter 2. Macroeconomic Shocks and Their Propagation

This chapter reviews and synthesizes our current understanding of the shocks that drive economic fluctuations. The chapter begins with an illustration of the problem of identifying macroeconomic shocks, followed by an overview of the many recent innovations for identifying shocks. It then reviews in detail three main types of shocks: monetary, fiscal, and technology. After surveying the literature, each section presents new estimates that compare and synthesize key parts of the literature. The penultimate section briefly summarizes a few additional shocks. The final section analyzes the extent to which the leading shock candidates can explain fluctuations in output and hours. It concludes that we are much closer to understanding the shocks that drive economic fluctuations than we were 20 years ago.