THE SOURCES OF BUSINESS CYCLES - A MONETARIST INTERPRETATION

Long-run restrictions can be imposed on a vector autoregressive model to identify structural macroeconomic shocks, as first proposed by Olivier Blanchard and Danny Quah. Here, I use restrictions motivated by Milton Friedman's remark that ''Inflation is always and everywhere a monetary phenomenon'' to identify low-frequency movements in inflation with changes in the central bank's desired inflation rate. I can then determine the portion of U.S. business-cycle fluctuations that results from changes in the inflation target. As well, I extend the Blanchard-Quah technique to overidentified models using an asymptotically efficient minimum-distance approach.