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Rare shocks, great recessions

Author

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  • Cúrdia, Vasco

    (Federal Reserve Bank of San Francisco)

  • Del Negro, Marco
  • Greenwald, Daniel L.

    (New York University)

Abstract

We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student’s t distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student’s t specification is strongly favored by the data even when we allow for low-frequency variation in the volatility of the shocks and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession period from the sample. We also show that inference about low-frequency changes in volatility—and in particular, inference about the magnitude of Great Moderation—is different once we allow for fat tails.

Suggested Citation

  • Cúrdia, Vasco & Del Negro, Marco & Greenwald, Daniel L., 2012. "Rare shocks, great recessions," Staff Reports 585, Federal Reserve Bank of New York, revised 01 Jun 2013.
    • Handle: RePEc:fip:fednsr:585
    Note: a published version of this report, see Vasco Cúrdia, Marco Del Negro, and Daniel L. Greenwald, "Rare Shocks, Great Recessions," Journal of Applied Econometrics 29, no. 7 (2014): 1032-52.
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    References listed on IDEAS

    as
    1. Chib, Siddhartha & Greenberg, Edward, 1994. "Bayes inference in regression models with ARMA (p, q) errors," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 183-206.
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    5. Ascari, Guido & Fagiolo, Giorgio & Roventini, Andrea, 2015. "Fat-Tail Distributions And Business-Cycle Models," Macroeconomic Dynamics, Cambridge University Press, vol. 19(02), pages 465-476, March.
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    More about this item

    Keywords

    Bayesian analysis; DSGE models; fat tails; stochastic volatility; Great Recession;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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