Sources of Macroeconomic Fluctuations: A Regime-Switching DSGE Approach


Daniel F. Waggoner

Tao Zha

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2009-01 | April 1, 2010

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.

Article Citation

Waggoner, Daniel F., Tao Zha, and Zheng Liu. 2009. “Sources of Macroeconomic Fluctuations: A Regime-Switching DSGE Approach,” Federal Reserve Bank of San Francisco Working Paper 2009-01. Available at

About the Author
Zheng Liu
Zheng Liu is a vice president and director of the Center for Pacific Basin Studies in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Zheng Liu