The size and dynamic effect of aggregate-demand and aggregate-supply disturbances in expansionary and contractionary regimes

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. (C) 2003 Elsevier Inc. All rights reserved.