Journal Article

Interpreting Permanent Shocks to Output When Aggregate Demand May Not Be Neutral in the Long Run

KEATING, JOHN W.

2013

Overview

This paper studies a popular statistical model of permanent and transitory shocks to output using a set of arguably more plausible structural assumptions. One way to structurally interpret the model is by assuming aggregate demand has no long-run output effect. However, many economic theories are inconsistent with that assumption. Instead, we reinterpret the statistical model assuming a positive shock to aggregate supply lowers the price level and in the long run raises output while a positive shock to aggregate demand raises the price level. Under these assumptions, a puzzling finding from the empirical literature implies that a positive aggregate demand shock had a long-run positive effect on output in pre-World War I economies.

• Publisher: Blackwell Publishing Ltd,Wiley Subscription Services,Wiley-Blackwell,Ohio State University Press
• Subject: Aggregate demand / aggregate demand and supply theory / Aggregate supply / Aggregate supply shocks / Assumptions / Bruttoinlandsprodukt / C32 / C52 / Demand shocks / Economic history / Economic shock / Economic theory / Gesamtwirtschaftliche Nachfrage / Gesamtwirtschaftliches Angebot / identification restrictions / Mathematical models / moving average representations / Neutralism / permanent and transitory shock decomposition / Preisniveau / Price levels / Price shocks / Prices / Schock / SHORTER PAPERS, DISCUSSIONS, AND LETTERS / Statistical analysis / Statistical models / Studies / Supply & demand / Supply shocks / Theorie / Vector autoregression / World War I