Afternoon Must-Read: Mark Thoma: Supply or Demand Shocks?

Mark Thoma: “On Whether Supply or Demand Shocks are the source of aggregate fluctuations…

…Blanchard and Quah (1989), Shapiro and Watson (1988), and others had it right (though the identifying restriction that aggregate demand shocks do not have permanent effects seems to be undermined by the Great Recession ). It’s not an either/or question, it’s a matter of figuring out how much of the variation in GDP/employment is due to supply shocks, and how much is due to demand shocks…. Overall, across all these papers, it is demand shocks that play the most prominent role. Supply shocks do matter, but not nearly so much as demand shocks when it comes to explaining aggregate fluctuations…