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.