The dynamic effects of aggregate demand and supply disturbances: Another Look

In a recent paper, Blanchard and Quah (American Economic Review, 1989, 79, 655–673) propose a set of restrictions to identify the structural innovations from a reduced-form bivariate model of income growth and unemployment. Given the assumptions made by Blanchard and Quah on the time-series properties of the data, this paper demonstrates that their bivariate model is just a special case of Stock and Watsonʹs Journal of the American Statistical Association, 1988, 83, 1097–1107) common trends representation. More importantly, this alternative representation allows the econometrician to test the long-run restrictions used by Blanchard and Quah to distinguish between demand and supply innovations