Identifying Aggregate Demand and Supply Shocks Using Sign Restrictions and Higher-Order Moments

Abstract

We use information in higher-order moments to identify aggregate supply and aggregate demand shocks for the U.S. economy. Traditional methods based on sign restrictions and/or second-order moments yield only “set” or “interval” identification but higher-order moments are shown to considerably aid identification. Aggregate supply shocks dominated recessions in the 1970s and early 1980s, while aggregate demand shocks dominated most later recessions. The Great Recession of 2008-2009 and the pandemic-induced recession of 2020 exhibited large components due to both negative aggregate demand and negative aggregate supply shocks.