<p>I don't think there is really a consensus and the definition depend on the field and context. Within applied macroeconomics, I prefer the definitions used by Blanchard and Watson (1986) and Bernanke (1986) and others. Valerie Ramey gives a good discussion of the definition in <a href="https://www.sciencedirect.com/science/article/pii/S1574004816000045" rel="nofollow noreferrer">"Macroeconomic shocks and their propagation"</a> in the <em>Handbook of macroeconomics, vol. 2</em>. You can see a discussion in a <a href="https://youtu.be/9qZRWDojM30?t=151" rel="nofollow noreferrer">YouTube video here.</a> </p>

<p>In short, a <em>shock</em> is an economically meaningful primitive exogenous force. We can think of these as the "empirical counterparts to the shocks we discuss in our theories." An innovation, on the other hand, is the residual from a reduced form VAR or similar model. An identifying assumption may establish a link between the innovation and the shock, but they are distinct concepts. </p>

<p>Within this context, the definition of a disturbance is less clear. Ramey mentions in the Handbook chapter that "shocks are most closely related to the structural disturbances in a simultaneous equation system."</p>

<ul>
<li><em>Ramey, Valerie A. "Macroeconomic shocks and their propagation." In Handbook of macroeconomics, vol. 2, pp. 71-162. Elsevier, 2016.</em></li>
</ul>

CC BY-SA 4.0
2019-07-17T00:28:38.003Z
2019-07-17T00:28:38.003Z
jmbejara
<p>In Greene "Econometric Analysis" the <strong>disturbance</strong> of linear regression,
<span class="math-container">$$\epsilon_t = y_t - \mathbf{x_t}\boldsymbol{\beta}$$</span></p>

<p>is estimated with the <strong>residual</strong>,
<span class="math-container">$$e_t = y_t - \mathbf{x_t b}$$</span></p>

<p>In the text, disturbances <span class="math-container">$\epsilon_t$</span> are also called <strong>innovations</strong>. Qualitative events in an economy that impact a process or model's variables or error term are <strong>shocks</strong>.</p>

CC BY-SA 4.0
2019-07-16T18:41:52.030Z
it's a difficult question because a lot of it is semantics but some of it isn't. you may find this useful. http://web.uvic.ca/~dgiles/blog/error.pdf
mark leeds
CC BY-SA 4.0
2019-06-16T03:59:32.943Z
2019-06-16T03:59:32.943Z
develarist
<p>Here's an example of why your question is difficult and depends on the framework.</p>

<p>Case 1: Take the classical OLS case <span class="math-container">$Y = \beta X + \epsilon$</span>.</p>

<p>In this case, the <span class="math-container">$\epsilon$</span> can thought of as an error term which represents noise around the response. So, the mean of the response is <span class="math-container">$\beta X$</span> but on any particular response is not going to be exactly equal to that mean because of <span class="math-container">$\epsilon$</span> which represents the variation around that mean. </p>

<p>Case 2: Take a simple dynamic model in econometrics such as  the ADL(1,0) so that <span class="math-container">$Y_t = \rho Y_{t-1} +  \beta X_{t} + \epsilon_t$</span>.</p>

<p>In this case, <span class="math-container">$\epsilon_t$</span> is not really noise because it's going to stay in <span class="math-container">$Y_{t}$</span> after that period is finished so it's actually part of the model. It's almost like an exogenous variable rather than noise so, to me, the best term in this case for <span class="math-container">$\epsilon$</span> would probably be innovation. It has what economists refer to as a "permanent" effect on the response.</p>

<p>So, my point is that each case can be different. <a href="http://web.uvic.ca/~dgiles/blog/error.pdf" rel="nofollow noreferrer">This paper by Qin</a> explains all of this in much more detail and more clearly.</p>

CC BY-SA 4.0
2019-07-16T22:59:34.190Z
2019-07-18T22:36:57.070Z
2019-07-18T22:36:57.070Z
mark leeds
<p>In macroeconomics and macroeconomic models, shocks, innovations, and disturbances are very prominent and often mentioned in the literature.</p>

<p>In general, is there a difference between macroeconomic shocks, disturbances, and innovations, or can these terms be used interchangeably? </p>

<macroeconomics><definition>
Difference between shocks, innovations and disturbances
Chris tie
# Difference between shocks, innovations and disturbances

(Asked by: username_0 on 2019-06-04)

In macroeconomics and macroeconomic models, shocks, innovations, and disturbances are very prominent and often mentioned in the literature.

In general, is there a difference between macroeconomic shocks, disturbances, and innovations, or can these terms be used interchangeably?

**Tags:** macroeconomics, definition


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## 3 answers

### Answer by username_1 on 2019-07-17. Score: 1 | Accepted answer

I don't think there is really a consensus and the definition depend on the field and context. Within applied macroeconomics, I prefer the definitions used by Blanchard and Watson (1986) and Bernanke (1986) and others. Valerie Ramey gives a good discussion of the definition in ["Macroeconomic shocks and their propagation"](https://www.sciencedirect.com/science/article/pii/S1574004816000045) in the *Handbook of macroeconomics, vol. 2*. You can see a discussion in a [YouTube video here.](https://youtu.be/9qZRWDojM30?t=151)

In short, a *shock* is an economically meaningful primitive exogenous force. We can think of these as the "empirical counterparts to the shocks we discuss in our theories." An innovation, on the other hand, is the residual from a reduced form VAR or similar model. An identifying assumption may establish a link between the innovation and the shock, but they are distinct concepts.

Within this context, the definition of a disturbance is less clear. Ramey mentions in the Handbook chapter that "shocks are most closely related to the structural disturbances in a simultaneous equation system."

* *Ramey, Valerie A. "Macroeconomic shocks and their propagation." In Handbook of macroeconomics, vol. 2, pp. 71-162. Elsevier, 2016.*


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### Answer by username_2 on 2019-06-16. Score: 2

In Greene "Econometric Analysis" the **disturbance** of linear regression,
$$\epsilon\_t = y\_t - \mathbf{x\_t}\boldsymbol{\beta}$$

is estimated with the **residual**,
$$e\_t = y\_t - \mathbf{x\_t b}$$

In the text, disturbances $\epsilon\_t$ are also called **innovations**. Qualitative events in an economy that impact a process or model's variables or error term are **shocks**.

> **Comments:**
> **username_3**: it's a difficult question because a lot of it is semantics but some of it isn't. you may find this useful. http://web.uvic.ca/~dgiles/blog/error.pdf  

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### Answer by username_3 on 2019-07-16. Score: 2

Here's an example of why your question is difficult and depends on the framework.

Case 1: Take the classical OLS case $Y = \beta X + \epsilon$.

In this case, the $\epsilon$ can thought of as an error term which represents noise around the response. So, the mean of the response is $\beta X$ but on any particular response is not going to be exactly equal to that mean because of $\epsilon$ which represents the variation around that mean.

Case 2: Take a simple dynamic model in econometrics such as the ADL(1,0) so that $Y\_t = \rho Y\_{t-1} + \beta X\_{t} + \epsilon\_t$.

In this case, $\epsilon\_t$ is not really noise because it's going to stay in $Y\_{t}$ after that period is finished so it's actually part of the model. It's almost like an exogenous variable rather than noise so, to me, the best term in this case for $\epsilon$ would probably be innovation. It has what economists refer to as a "permanent" effect on the response.

So, my point is that each case can be different. [This paper by Qin](http://web.uvic.ca/~dgiles/blog/error.pdf) explains all of this in much more detail and more clearly.


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