What caused the early millennium slowdown? Evidence based on vector autoregressions

Abstract

SUMMARYThis paper uses a simple VAR for the USA and Euro area to analyse the underlying shocks of the early millennium slowdown, i.e. supply, demand, monetary policy and oil price shocks. The results of two identification strategies are compared. One is based on traditional zero restrictions and, as an alternative, an identification scheme based on more recent sign restrictions is proposed. The main conclusion is that the recent slowdown is caused by a combination of several shocks: negative aggregate supply and aggregate spending shocks, the increase of oil prices in 1999, and restrictive monetary policy in 2000. These shocks are more pronounced in the USA than the Euro area. The results are somewhat different depending on the identification strategy. It is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks.

The dynamic effects of shocks to wages and prices in the United States and the Euro Area

“…Even though such an approach is very common in the literature where structural VAR models are used to compare impulse response functions of small or large economies (see, for instance, Peersman, 2005, Canova et al, 2007, or Peersman and Robays, 2009 drawn here on the relative persistence of real wages, wage and price in ‡ation in the US and the EA 1 .…”

“…Although import prices increase permanently in the long run in both economies (eventually following a currency depreciation induced by higher unemployment), the reaction is stronger in the US, possibly due to higher sensitivity of the dollar to domestic conditions. In addition, the unemployment rate levels o¤ at a higher level in the EA, eventually re ‡ecting greater institutional rigidity of the labour market (see, for instance, Abbritti andWeber, 2008, andPeersman andRobays, 2009). As a consequence, prices rise more markedly in the US economy relatively to the EA, and partially o¤set the e¤ect of higher unemployment on wages in the long run, which remain virtually unchanged.…”

“…As regards the institutional rigidity of the labour market (involving, for instance, employment protection, …ring and hiring costs), the evidence in the existing literature suggests that the US labour market is more ‡exible compared to the EA, thus allowing a faster adjustment to shocks hitting the economy (see, for instance, Abbritti andWeber, 2008 andPeersman andRobays, 2009). …”

Effects of oil shocks on EMU exports: technological level differences

“…They find that oil-demand shocks influence economic activity in given countries while oil-supply shocks do not have a significant impact. Using structural VAR model, authors as Bernanke et al (1997), Lee and Ni (2002), Peersman (2005) or Peersman and Van Robays (2009) identified oilsupply shocks, oil-demand shocks and oil-specific demand shocks. Kilian and Hicks (2012) or Aastveit et al (2015) found that surge of real oil-price in the 2000s was caused by a rapid growth of demand in emerging economies.…”

Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle

“…Faust, 1998;Canova and de Nicolo, 2002;Peersman, 2005;Uhlig, 2005). The structural shocks, η t , and the reduced form residuals, ε t , are related through the linear mapping:…”