Rare shocks, great recessions

Arbeitspapier

We estimate a DSGE model where rare large shocks can occur, but replace the commonly used Gaussian assumption with a Student's t-distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student's t specification is strongly favored by the data, even when we allow for low-frequency variation in the volatility of the shocks, and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession from the sample. We also show that inference about low-frequency changes in volatility - and, in particular, inference about the magnitude of the Great Moderation - is different once we allow for fat tails.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 585

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Business Fluctuations; Cycles
• Subject: Bayesian analysis ; DSGE models ; fat tails ; stochastic volatility ; Great Recession

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cúrdia, Vasco ; Del Negro, Marco ; Greenwald, Daniel L.
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/93650
• Last update: 10.03.2025, 11:42 AM CET