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Atlanta Fed Working Papers


Sources of Macroeconomic Fluctuations: A Regime-Switching DSGE Approach

Zheng Liu, Daniel F. Waggoner, and Tao Zha
Working Paper 2009-3a
Revised October 2010

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We examine the sources of macroeconomic economic fluctuations by estimating a variety of medium-scale DSGE models within a unified framework that incorporates regime switching both in shock variances and in the inflation target. Our general framework includes a number of different model features studied in the literature. We propose an efficient methodology for estimating regime-switching DSGE models. 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 find little evidence of changes in the inflation target. We identify three types of shocks that account for most of macroeconomic fluctuations: shocks to total factor productivity, wage markup, and the capital depreciation rate.

JEL classification: C11, C51, E32, E42, E52

Key words: systematic analysis, regime switching, depreciation shock, efficient estimation methods


The authors thank Craig Burnside, Larry Christiano, Tim Cogley, Chris Erceg, Marco Del Negro, Wouter Den Haan, Martin Ellison, Jesus Fernandez-Villaverde, Jordi Gali, Marc Giannoni, Michael Golosov, Pat Higgins, Alejandro Justiniano, Soyoung Kim, Junior Maih, Christian Matthes, Ulrich Müeller, Andy Levin, Lee Ohanian, Pietro F. Peretto, Giorgio Primiceri, Frank Schorfheide, Chris Sims, Harald Uhlig, and seminar participants at the Bank of Korea, NBER summer institute, UC Berkeley, SED, and Duke University for helpful discussions and comments. Eric Wang provided valuable assistance in grid computing. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Zheng Liu, Research Department, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105, 415-974-3328, zheng.liu@sf.frb.org; Daniel F. Waggoner, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4740, 404-498-8278, daniel.f.waggoner@atl.frb.org; or Tao Zha, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4740, 404-498-8353, tzha@earthlink.net.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.