What Caused the Early Millennium Slowdown? Evidence Based on Vector Autoregressions

This paper uses a number of simple VAR models for the industrialised world, the United States and the euro area respectively to analyse the underlying shocks that may have caused the recent slowdown. The results of two identification strategies are compared. One is based on traditional zero restrictions and, as an alternative, an identification scheme based on more recent sign restrictions is proposed. The main conclusion is that the recent slowdown was caused by a combination of several shocks: a negative aggregate supply and aggregate spending shock, the increase of oil prices in 1999, and restrictive monetary policy in 2000. These shocks were more pronounced in the United States than the euro area. The results are somewhat different depending on the identification strategy. It is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks