*Source of the Great Recession DOI: http://dx.doi.org/10.5772/intechopen.90729*

#### **Figure 7.**

*Historical decomposition of output. (a) Constant volatility Case A. (b) Stochastic volatility Case B. (c) Constant volatility data rich Case C. (d) Stochastic volatility data rich Case D. Notes: Four Cases A, B, C and D are described in Table 1. Case A; 11 observable variables and constant volatility shocks. Case B: 11 observable variables and structural shocks with SV. Case C: 40 observable variables and constant volatility shocks. Case D: 40 observable variables and structural shocks with SVs. Eight shocks are explained in Section 2 and SV shocks are explained in Section 3.*

specialized in US mortgage debt at this moment.), the SVs of net-worth shocks of financial and nonfinancial sectors have rapidly jumped to ceil for both of Case B and D, as well as other shocks such as TFP, monetary policy, IST and labor supply shocks. And levels of these SVs (deep blue lines) exceed the red dashed flat lines indicating estimation of constant volatilities as **Figure 6**.

In this study, we would like to verify whether the data-rich approach contributes to the accuracy of the estimated SVs, compared with standard data structure. **Figures 4(b)** and **5(b)** show averages of the 90% interval (light shade area) in Cases B does not look different from those of Case D. And, although **Figure 6** reports difference in sizes of the 90% intervals (light shade area) of the SVs over the entire sample period between Cases B and D, we do not find obvious improvement of 90% band by the data-rich approach in Case D. From only the three figures, we cannot yet include the data-rich environment improve the accuracy of the SVs estimates. This inquiry will be remained until further research.

shocks, but investment-specific technology (IST) shock and the labor supply shocks, look very similar in Cases B and D. And the SVs of the preference and labor supply shocks fluctuate with large amplitude during the period of the expansion between 2001:Q4 and 2007:Q4, and it indicates that they have played an important role of boom. Meanwhile, the SVs of the remaining shocks seem to be quiet and level off between 1990:Q1 and 2007:Q3. After August 2007, when the Great Recession began with the seizure in the banking system (in fact, BNP Paribas precipitated

*Stochastic volatilities of structural shocks. (a) Stochastic volatility: Case B. (b) Stochastic volatility data rich: Case D. Notes: Case B and Case D are described in Table 1. Eight shocks in our DSGE model are explained in Section 2. Corporate Net Worth shock and Bank Net Worth are balance sheet shocks of nonfinancial and financial sectors described in Figure 1(b). TFP (total factor productivity), investment specific technology, and labor shock are belong to supply shocks, whereas preference of consumers, monetary policy, and government spending shocks belong to demand shocks. The deep blue lines and blue shaded area are posterior mean and 90% credible interval of stochastic volatility (SV) of Cases B and D, respectively. The red dashed lines denote the posterior means of constant volatilities shocks estimated in Case A and C, respectively. SV shocks are explained*

**Figure 6.**

*Financial Crises - A Selection of Readings*

*in Section 3.*

**42**

ceasing investment activity and was followed by three big hedge funds that

**Figure 8.**

*Historical decomposition of investment. (a) Constant volatility Case A. (b) Stochastic volatility Case B. (c) Constant volatility data rich Case C. (d) Stochastic volatility data rich Case D. Notes: See the notes of Figure 7.*

**4.2 Historical decompositions**

*Source of the Great Recession*

*DOI: http://dx.doi.org/10.5772/intechopen.90729*

**Figure 9.**

**45**

Here, we move to discuss about difference of historical decompositions among the four cases. In particular, as can be seen from Figures 7**(a)–(d)**–10**(a)–(d)**, we focus on the periods between 2000:Q1 and 2012:Q2 of the following four observations and model variables, say (1) the real GDP of observations matching to an output gap of model variable, similarly (2) the gross private domestic investment matching to investment, (3) Moody's bond index (corporate Baa) matching to corporate borrowing rate, (4) the commercial banks' leverage ratio matching to the bank leverage ratio. The red and black circle lines represent observations and smoothed estimation, respectively. The differences between both lines indicate measurement errors of observations. In these figures, the light blue shade represents the period of the Great Recession (2007:Q3 to 2009:Q2). In order to make more visible and to concentrate on the contributions of both net-worth shocks of banking sector (deep blue shade area) and corporate sector (green shade area) for the recession by remaining key shocks like the TFP (red shade area) and monetary

*Historical decomposition of borrowing rate. (a) Constant volatility Case A. (b) Stochastic volatility Case B. (c) Constant volatility data rich Case C. (d) Stochastic volatility data rich Case D. Notes: See the notes of Figure 7.*

Finally, we turn to analyzing the monetary policy in the Great Recession and after it including an unconventional monetary policy by FRB such as Round 1 of quantitative easing policy (QE1), between 2008:Q4 and 2010:Q2 and Round 2 of quantitative easing policy (QE2) between 2010:Q4 and 2011:Q2, although our monetary policy rule follows linearized Taylor rules. As the fourth row of **Figures 4** and **5**, we can find the estimation of monetary policy shocks (deep blue lines) have two big negative troughs in this period for all cases. The first negative trough was identified at 2007:Q4 when the global financial market was disarranged by announcement of the BNP Paribas. And the second trough was ascertained at 2008:Q3, immediately before the FRB implemented QE1. Especially, the sizes of the two big negative shocks are classified in the Cases B and D with SVs shocks, as shown in **Figures 4(b)** and **5(b)**. The fourth row of **Figure 6** also draws the rapid surge of these volatilities of monetary policy shocks between 2007:Q4 and 2008:Q3. In other words, the two unconventional monetary policy might be undertaken more boldly and without hesitation as well as the case of conventional tightening policy according to the 90% credible band of the SVs.
