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  • Stéphane Lhuissier (a1)


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.


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


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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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