TY - CEPII
A1 - St├ęphane Lhuissier
TI - The Regime-switching volatility of Euro Area Business Cycles
IS - 2015-22
T3 - Working Papers
KW - Business Cycles
KW - DSGE
KW - Euro Area
KW - Heteroskedasticity
KW - Markov-switching
N2 - 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.
ER -