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 MÃ¼eller, 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.
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