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Does demand noise matter? Identification and implications

Abstract : We assess the role of demand noise (excessive optimism or pessimism about demand) together with supply noise (excessive optimism or pessimism about supply). To do so, we propose a methodology to decompose business cycles into supply, demand, supply noise and demand noise shocks, using a structural vector autoregression model. Key to our identification of both supply noise and demand noise is the use of sign restrictions on survey expectation errors about output growth and about inflation. We show that demand-related noise shocks have a negative effect on output and contribute substantially to its fluctuations. Monetary policy and private information seem to play a key role in the transmission of demand noise shocks.
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https://hal-amu.archives-ouvertes.fr/hal-03173423
Contributor : Elisabeth Lhuillier <>
Submitted on : Thursday, March 18, 2021 - 2:38:09 PM
Last modification on : Monday, March 29, 2021 - 2:46:29 PM

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Kenza Benhima, Céline Poilly. Does demand noise matter? Identification and implications. Journal of Monetary Economics, Elsevier, 2021, 117, pp.278-295. ⟨10.1016/j.jmoneco.2020.01.006⟩. ⟨hal-03173423⟩

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