Two's not company: mis-aggregation and "supply-induced" unemployment increases

Hoffmaister, Alexander W. (2022): Two's not company: mis-aggregation and "supply-induced" unemployment increases.

Abstract

The seminal work by Blanchard and Quah (1989) identifying long-run shocks finds that the unemployment rate increases following a “supply” shock. This puzzling result engenders a lively debate between leading schools of macroeconomic thought. But should we employ this model to study macroeconomic fluctuations? Faust and Leeper (1997) warn that the model is not reliable for structural inference, nor is the related Bayoumi and Eichengreen (1993) model. In this paper, I revisit the disputed result from the viewpoint of IRF’s bias. Using a novel methodology to parse the sources of IRF’s bias, I find that “supply-induced” unemployment increases reflect mis-aggregation of technology and labor-supply shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: vector autoregression; permanent and temporary shocks to output; missing-variables; fundamentalness; mis-aggregated shocks; co-mingled shocks; impulse response function bias; moving-average representation; aggregate demand and supply shocks; long-run neutrality; labor-supply shocks; contractionary technology shocks
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

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