What drives business cycles in Sweden?

A sign restriction structural VAR approach *

What are the structural shocks that drive the business cycle in Sweden? In this paper we have identified a structural VAR model for Sweden using the sign restriction method. The model includes two demand and two supply shocks. With the help of the model we provide an interpretation of the Swedish business cycle and explain what are the shocks that have been driving the output in the last two decades. The model's forecasting properties are also discussed. Results suggest that a technology shock was contributing strongly to the GDP growth in several long periods. A positive technology shock was present during the dot-com boom and as the IT bubble bursted the positive technology wave continued. Sweden was benefiting from several positive shocks before the outburst of the global financial crisis in 2008 and the contribution from an external demand shock was even greater than the productivity shock. In turn, as the financial crisis began, the external demand shock was weighing heavily on GDP growth. The domestic demand shock does not seem to have contributed neither in the build up of the boom nor in the bust. Moreover, the forecast error variance analysis suggests that almost half of the forecast error in the GDP growth is due to external demand shocks and productivity shocks. This sounds plausible for a small open, knowledge- based economy like Sweden.