Shocks and Aggregate Low Frequency Variability in a Small Open Economy

Abstract

What are the ultimate sources of aggregate economic fluctuations? Despite research efforts spanning more than a century, our knowledge of this central question in macroeconomics is embarrassingly limited. To be sure, some progress has been made to date. Thus, Ragnar Frisch has made us aware of the stochastic, yet regular nature of aggregate variability. Aggregate variability is seen as the outcome of new, unexpected information impinging on the economy. Beginning with the pioneering empirical work of Jan Tinbergen, rough ideas have been obtained of how big a role different kinds of shocks — real and nominal — play in generating macroeconomic fluctuations. On the methodological side, we have come to understand that neither ‘measurement without theory’ nor ‘theory without measurement’ alone will do when studying economic fluctuations. The fusion of economic theory and statistical observation is essential in any serious attempt at gaining greater insight into the most important and intriguing questions in macroeconomics.