Sources of Output and Price Variability in a Macroeconometric Model

Ray C. Fair

NBER Working Paper No. 2112 (Also Reprint No. r1267)
Issued in December 1986
NBER Program(s):Economic Fluctuations and Growth

There has been much recent discussion about the ultimate sources of macroeconomic variability. A number of authors attribute most of this variability to only a few sources, sometimes only one. Although there may be only a few important sources, this is far from obvious, since economies seem complicated. The purpose of this paper is to provide quantitative estimates of various sources of variability using my U.S. econometric model. Stochastic simulation is used to estimate how much the overall variances of real GNP and the GNP deflator are reduced when various shocks are suppressed in the model. The results show two main things. The first is that the contribution of a given shock to the variance can vary considerably as the length ahead of the prediction varies. What is important for the one-quarter-ahead prediction may not be important for the eight-quarter-ahead prediction, and vice versa. The second is that the results imply that there are many important sources of variability for real GNP. It is not the case that one or two sources dominate. This is less true for the GNP deflator, however, where there are two very important sources, shocks to the price and wage equations and shocks to the price of imports, and one moderately important one, shocks to the government exogenous variables.

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Document Object Identifier (DOI): 10.3386/w2112

Published: "Sources of Economic Fluctuations in the United States." From The Quarterly Journal of Economics, Vol. CIII, No. 2, pp. 313-332, (May 1988).

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