Noise shocks and business cycle fluctuations in three major European Economies

Abstract

This paper investigates how supply noise and demand noise contribute to business cycle fluctuations in three major European economies. A structural vector autoregressive model is used to identify supply, demand, supply noise and demand shocks. The identification scheme is built on nowcast errors of output growth and the inflation rate that are derived from the Consensus Economics Survey. The results indicate that positive supply noise and positive demand noise shocks have an expansionary effect on output, but their magnitude differs across countries. The two shocks contribute equally to business fluctuations, and jointly, they account for around one quarter of the total variation in GDP in each of the three countries.