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Empirical Economics

, Volume 56, Issue 2, pp 445–467 | Cite as

Are we ignoring supply shocks? A proposal for monitoring cyclical fluctuations

  • Carolina PagliacciEmail author
Article
  • 58 Downloads

Abstract

Although there are several mechanisms within theoretical models acknowledging that supply shocks can account for an important part of output fluctuations, even in the short-run, policy practitioners continue endorsing the idea that only demand shocks explain them. This article provides empirical evidence on several Latin American countries and the USA to show that the share of output variance explained by supply shocks in the short-run is substantial. It also offers a more agnostic implementation of the Blanchard–Quah type of structural analysis that focuses on policy evaluation. For this purpose, we propose constructing two indicators out of the historical decomposition of shocks: the goods market unbalance (GMU) and the total cyclical fluctuations (TCF). While GMU is an excess demand measurement that reveals the scope of the distortions caused by shocks, TCF, combined with GMU, helps to understand what type of shock is predominantly explaining (output and inflation) fluctuations. These two pieces of information provide a very different diagnosis than traditional output gaps and should guide monetary policy interventions more adequately. The agnosticism of this proposal has two aspects: the use of a different identification strategy and the assessment of the effects of both supply and demand shocks on output.

Keywords

Cyclical fluctuation Structural demand and supply identification Sign restriction identification 

JEL Classification

E32 E31 C32 

Notes

Acknowledgements

This paper received the financial support of the Centro de Estudios Monetarios Latinoamericanos (Cemla) through the part-time at distance internship modality. This paper has also benefited from the comments of two anonymous referees and the participants at the seminars of Central Bank of Venezuela and Cemla, especially Daniel Barráez, Alberto Ortiz, Kólver Hernández, Horacio Aguirre, Jorge Hernández, Nora Guarata and Paul Castillo. Lorena Barreiro provided excellent research assistance.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Economic Research OfficeCentral Bank of VenezuelaCaracasVenezuela

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