This paper examines the driving forces of economic fluctuations in a New Neoclassical Synthesis model of the U.S. economy, estimated using Bayesian methods. The model includes several shocks and frictions, such as shocks to total factor productivity, the marginal efficiency of investment, and desired wage markups. The key findings are: 1. **Investment Shocks**: These shocks account for 50-60% of the variance in output and hours at business cycle frequencies, and over 80% of the variance in investment. This is in contrast to previous literature, which often attributes the bulk of business cycle fluctuations to neutral technology shocks. 2. **Labor Supply Shocks**: These shocks explain a large fraction of the variation in hours at very low frequencies but are irrelevant over the business cycle. This is significant because labor supply shocks are commonly used in business cycle models but are often considered unappealing by economists. 3. **Monopolistic Competition**: This friction is crucial in transmitting investment shocks. It breaks the intratemporal efficiency condition, allowing investment shocks to have procyclical effects on consumption and hours. 4. **Model Fit**: The estimated model fits the data well, with a marginal likelihood significantly higher than other models considered, suggesting that the inclusion of frictions is important for capturing business cycle dynamics. 5. **Comparison with Previous Literature**: The paper compares its results to those of Smets and Wouters (2007), finding that the discrepancy in the role of investment shocks is due to differences in the measurement of observable variables. Specifically, the inclusion of durable expenditures in consumption and the exclusion of inventories from investment affect the comovement and volatility of investment and consumption. 6. **Mechanisms**: The paper discusses how monopolistic competition, endogenous capital utilization, and investment adjustment costs contribute to the procyclical movements in key macroeconomic variables in response to investment shocks. Overall, the paper provides a comprehensive analysis of the sources of business cycle fluctuations, highlighting the importance of investment shocks and the role of frictions in their transmission.This paper examines the driving forces of economic fluctuations in a New Neoclassical Synthesis model of the U.S. economy, estimated using Bayesian methods. The model includes several shocks and frictions, such as shocks to total factor productivity, the marginal efficiency of investment, and desired wage markups. The key findings are: 1. **Investment Shocks**: These shocks account for 50-60% of the variance in output and hours at business cycle frequencies, and over 80% of the variance in investment. This is in contrast to previous literature, which often attributes the bulk of business cycle fluctuations to neutral technology shocks. 2. **Labor Supply Shocks**: These shocks explain a large fraction of the variation in hours at very low frequencies but are irrelevant over the business cycle. This is significant because labor supply shocks are commonly used in business cycle models but are often considered unappealing by economists. 3. **Monopolistic Competition**: This friction is crucial in transmitting investment shocks. It breaks the intratemporal efficiency condition, allowing investment shocks to have procyclical effects on consumption and hours. 4. **Model Fit**: The estimated model fits the data well, with a marginal likelihood significantly higher than other models considered, suggesting that the inclusion of frictions is important for capturing business cycle dynamics. 5. **Comparison with Previous Literature**: The paper compares its results to those of Smets and Wouters (2007), finding that the discrepancy in the role of investment shocks is due to differences in the measurement of observable variables. Specifically, the inclusion of durable expenditures in consumption and the exclusion of inventories from investment affect the comovement and volatility of investment and consumption. 6. **Mechanisms**: The paper discusses how monopolistic competition, endogenous capital utilization, and investment adjustment costs contribute to the procyclical movements in key macroeconomic variables in response to investment shocks. Overall, the paper provides a comprehensive analysis of the sources of business cycle fluctuations, highlighting the importance of investment shocks and the role of frictions in their transmission.