The Time Varying Volatility of Macroeconomic Fluctuations

Abstract

In this paper we investigate the sources of the important shifts in the volatility of U.S. macroeconomic variables in the postwar period. To this end, we propose the estimation of DSGE models allowing for time variation in the volatility of the structural innovations. We apply our estimation strategy to a large-scale model of the business cycle and …nd that investment speci…c technology shocks account for most of the sharp decline in volatility of the last two decadesGreat Moderation, Stochastic Volatility, Investment Specific Technology Shock, Relative Price of Investment, DSGE Models