Sources of the Great Moderation: shocks, frictions, or monetary policy?

Zheng Liu, Daniel Waggoner and Tao Zha

No 2009-03, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale dynamic stochastic general equilibrium (DSGE) models that incorporate regime switches in shock variances and the inflation target. The best-fit model?the one with two regimes in shock variances?gives quantitatively different dynamics compared with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate considerably fewer nominal rigidities than the literature suggests.

Keywords: Econometric; models (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Sources of the Great Moderation: shocks, friction, or monetary policy? (2009)
Working Paper: Sources of the Great Moderation: Shocks, Frictions, or Monetary Policy? (2009)
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