Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model

We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US
macroeconomic series. We find that (i) the US economy is well described by a number of structural
shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal.
We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy
matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with
little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large
long-run positive effect on productivity, consistently with the Schumpeterian “cleansing” view of
recessions.