On the long-run neutrality of demand shocks

- We revisit the seminal paper by Blanchard and Quah (1989).
- We achieve identification of shocks via smoothly changing variances.
- The effects of the positive demand shocks on output remain permanently positive.
- A formal test rejects the long-run neutrality of the demand shocks.

We revisit the seminal paper by Blanchard and Quah (1989) and investigate their long-run identification scheme. We use a structural VAR model with smoothly changing covariances for the identification of shocks. Formal testing rejects the long-run neutrality of demand shocks.