THE REGIME-SWITCHING VOLATILITY OF EURO AREA BUSINESS CYCLES

Stéphane Lhuissier

Macroeconomic Dynamics, 2018, vol. 22, issue 2, 426-469

Abstract: We document the strong evidence of time variation in the volatility of Euro Area business cycles since 1970. Then we provide the quantitative sources of these changes using a medium-scale DSGE model allowing time variation in structural disturbance variances. We show that (1) the size of different types of shock oscillates, in a synchronized manner, between two regimes over time, with the high-volatility regime prevailing predominantly in the 1970s, sporadically in the 1980s and 1990s, and during the Great Recession; (2) their relative importance remains, however, unchanged across regimes, where neutral technology shocks and marginal efficiency of investment shocks are the dominant sources of business cycle fluctuations; and 3) these investment shocks, which affect the transformation of savings into productive capital, can be interpreted as an indicator of credit conditions.

Date: 2018
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Working Paper: The Regime-switching volatility of Euro Area Business Cycles (2015)
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