Highlights :

• From the early 1990s to the onset of the Great Recession in 2008, the volatility of business cycle fluctuations in the euro area declined from the high levels of prior eras.
• This period of "Great Moderation" appears to be due to smaller economic shocks, which were mostly associated to productivity and marginal efficiency of investment.
• These investment shocks, which affect the efficiency of the system of financial intermediation to transform savings into real capital, can be interpreted as an indicator of credit conditions in the euro area.

 Abstract :
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 by 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 condtions.

 Keywords : Business Cycles | DSGE | Euro Area | Heteroskedasticity | Markov-switching

 JEL : c11, c51, e32, e42, e52