Identifying the two sub-systems of macroeconomic fluctuations

This paper considers macroeconomic fluctuations as a system combining two sub-systems. One is demand shock and the other is supply shock. By virtue of wavelet denoising techniques, the authors identify demand shock as a Gaussian white noise from the series of real gross domestic production. Then supply shock is obtained by the cycle component from the Hodrick-Prescott filter minus demand shock. Thus demand and supply shocks identified can be featured as containing factors with transitory and permanent effects on economy, respectively. The identifying procedure is helpful for policy makers to judge whether the macroeconomic system is over-heating, as well as to take proper measures in order to regulate and control the demand shock.