Abstract
This paper examines the existence, size and dynamic effect of temporary aggregate-demand disturbances and permanent aggregate-supply disturbances to economic output in expansionary and contractionary regimes. It estimates a structural, bivariate threshold model which exploits the joint behavior of output and unemployment. This model finds that aggregate-demand (aggregate-supply) disturbances dominate output fluctuations in the contractionary (expansionary) regime. This is consistent with macroeconomic models with an aggregate-supply ceiling, credit rationing, or a convex aggregate-supply curve. It implies that policymakers should minimize the variance of aggregate-demand disturbances and maximize the level of aggregate supply.
Published Version
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