DP2028 Did You Know that Monetary Disturbances Matter for Business Cycles Fluctuations? Evidence from the G-7 Countries

Author(s): Fabio Canova , Gianni de Nicolo

Publication Date: November 1998

Keyword(s): Business Cycles , dynamic correlations , monetary models , structural shocks

JEL(s): C68 , E32 , F11

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2028.asp

This paper examines the question of which shock generates cyclical movements in output and inflation using an alternative approach. We find that in the G-7 countries output cycles are driven by different structural disturbances, that monetary disturbances play a significant role in at least four of the seven countries and that the dominant cause of output innovations within countries has changed after 1982. Inflation cycles are much more homogeneous across countries and are driven by a combination of supply and monetary disturbances. The disturbances we have identified explain large portions of output and inflation cycles, but are not a major cause of fluctuations in financial and money markets. The theoretical and policy implications of the findings are discussed.