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Published online by Cambridge University Press:  22 June 2017

Stéphane Lhuissier*
Address correspondence to: Stéphane Lhuissier, CEPII, 113, Rue de Grenelle, 75007 Paris Cedex, France; e-mail:; URL:


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 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 conditions.

Copyright © Cambridge University Press 2017 

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I am deeply indebted to Michel Juillard and Tao Zha for their guidance and advice. I also thank two anonymous referees, Jean-Guillaume Sahuc and participants at several seminars for their helpful comments. This paper is a revised version of the second chapter of my Ph.D. thesis. It previously circulated as “Heteroskedastic Shocks and the Great Moderation in the Euro Area.”



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