Journal of Money, Credit, and Banking

This paper uses the short-run restrictions implied by a simple aggregate demand-aggregate supply model as an aid in identifying structural shocks. Combined with the Blanchard—Quah restriction, it allows estimation of the slope of the aggregate supply curve, the variances of structural demand and supply shocks, and the extent to which structural demand and supply shocks are correlated. This paper finds that demand and supply shocks are highly correlated and that demand shocks possibly can account for as much as 82% of the long-run forecast error variance of real U.S. GDP.