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

Zheng Liu (), Daniel Waggoner () and Tao Zha ()

No 2009-01, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale DSGE models that incorporate regime switches in shock variances and in the inflation target. The best-fit model, the one with two regimes in shock variances, gives quantitatively different dynamics in comparison 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 much less nominal rigidities than those suggested in the literature.

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