Open AccessSources of macroeconomic fluctuations: A regime‐switching DSGE approach
Author(s) -
Liu Zheng,
Waggoner Daniel F.,
Zha Tao
Publication year - 2011
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe71
Subject(s) - dynamic stochastic general equilibrium , shock (circulatory) , economics , counterfactual thinking , inflation (cosmology) , depreciation (economics) , econometrics , monetary economics , monetary policy , macroeconomics , physics , capital formation , human capital , medicine , philosophy , epistemology , financial capital , theoretical physics , economic growth
We examine the sources of macroeconomic fluctuations by estimating a variety of richly parameterized DSGE models within a unified framework that incorporates regime switching both in shock variances and in the inflation target. We propose an efficient methodology for estimating regime‐switching DSGE models. Our counterfactual exercises show that changes in the inflation target are not the main driving force of high inflation in the 1970s. The model that best fits the U.S. time‐series data is the one with synchronized shifts in shock variances across two regimes, and the fit does not rely on strong nominal rigidities. We provide evidence that a shock to the capital depreciation rate, which resembles a financial shock, plays a crucial role in accounting for macroeconomic fluctuations.