**4. Empirical results**

with i.i.d shocks, including 40 observable variables, which indicate more or less four observable variables corresponding to one specified model variable. And the fourth case (**Case D**) extends to the data-rich approach with SV shocks from

By adopting the data-rich approach, we can adopt a relatively large and quarterly panel dataset with 40 observable variables. (More detail explanation of the observations is in the section, Appendix, in the end of the chapter.) In order to focus on the period of Great Moderation after 1984, we estimate between 1985:Q2 and 2012:Q2 including the Great Recession (Dec. 2007–Jun. 2009) and after it, since avoiding the period of the instable monetary policy regime, especially around the end of the 1970s and the early 1980s, say Hyper Inflation, directed by chairmen of

The contents of 40 observations are described in **Appendix** in the end of this chapter. Here, we mention about how to assort them based on the four cases. In Cases A and B, we looked at the following 11 series: (1) output, (2) consumption, (3) investment, (4) inflation, (5) real wage, (6) labor input, (7) the nominal interest rate, (8) the nominal corporate borrowing rate, (9) the external finance premium, (10) the corporate leverage ratio, and (11) the bank leverage ratio. The first seven series are following Smets and Wouters [5, 6]. The four remaining financial observable variables were selected for matching the model variables corresponding to the two financial frictions. The entrepreneur's nominal borrowing rate is the yield on Moody's Baa-rated corporate bonds detrended by the Hodrick-Prescott filter.

*Observed financial data for identifying two financial shocks. (a) External finance premium. (b) Corporate leverage ratio. (c) Bank leverage ratio. (d) Borrowing rate. Notes: Four panels show 11 series involved in both the financial and nonfinancial sectors corresponding to the four model variables of the two financial frictions, respectively. These observations are used to identify the two financial shocks. For more detail description, see*

Case C.

**Figure 3.**

**38**

*Appendix in the end of chapter.*

**3.3 Data description**

the FRB, P. Volcker and A. Greenspan.

*Financial Crises - A Selection of Readings*

Before discussing and remaking the source of Great Recession, we firstly report estimation results, especially focusing on estimations of eight structural shocks by smoothing technique and historical decompositions of four key model variables, (a) output, (b) investment, (c) bank leverage ratio, and (d) borrowing rate, based on the four cases. Those estimations must be significant clue for figuring it out.
