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The Regime-Switching Volatility Of Euro Area Business Cycles

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  • Lhuissier, Stéphane

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 by 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 condtions.
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Suggested Citation

  • Lhuissier, Stéphane, 2018. "The Regime-Switching Volatility Of Euro Area Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(02), pages 426-469, March.
  • Handle: RePEc:cup:macdyn:v:22:y:2018:i:02:p:426-469_00
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    1. Jean-Guillaume Sahuc & Frank Smets, 2008. "Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 505-521, March.
    2. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
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    5. Angeloni,Ignazio & Kashyap,Anil K. & Mojon,Benoît (ed.), 2003. "Monetary Policy Transmission in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521828642.
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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