Puzzling Comovements between Output and Interest Rates? Multiple Shocks are the Answer

Stylized facts on output and interest rates in the U.S. have so far proved hard to match with business cycle models. But these findings do not acknowledge that the economy might well be driven by different shocks, and by each in different ways. I estimate covariances of output, nominal and real interest rate conditional on two types of shocks: Technology and monetary policy. For the real rate, results square with standard models. The "puzzling" overall comovements come from the interaction of various shocks. For the nominal rate, non-technology and non-monetary shocks play an important role.