This paper studies the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. The model shows that shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and technological frictions are key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing. The model includes shocks to total factor productivity (neutral technology shock), marginal productivity of investment (investment shock), and desired wage markups (labor supply shock). It is an ideal laboratory to study the driving forces of fluctuations because it fits competitively with unrestricted VARs, encompasses most views on business cycle sources in a general equilibrium framework, and allows disturbances other than neutral technology shocks to be plausible cyclical forces. In the estimated model, investment shocks account for between 50 and 60 percent of the variance of output and hours at business cycle frequencies and more than 80 percent of that of investment. Neutral technology shocks explain about a quarter of the movements in output and consumption, although only about 10 percent of those in hours. These numbers are close to those estimated by Fisher (2006) within a structural VAR. Labor supply shocks are irrelevant over the business cycle, although they dominate the fluctuations of hours at very low frequencies. This finding is important because labor supply shocks are a key ingredient of many business cycle models, but many economists find them intellectually unappealing. According to our results, these disturbances can be ignored when studying business cycles, although they are necessary to account for the low level of hours worked in the seventies and early eighties. Other papers in the literature study the sources of fluctuations in empirical medium-scale DSGE models. In particular, Smets and Wouters (2007) present an analysis of the driving forces of output as one of the applications of their estimated model of the U.S. economy. In contrast to our results, however, they conclude that “it is primarily two “supply” shocks, the productivity and the wage mark-up shock, that account for most of the output variations in the medium to long run,” while they find almost no role for the investment shocks beyond the shortest horizons. We show that these conclusions depend on the unusual definition of consumption and investment adopted by Smets and Wouters (2007). They include durable expenditures in consumption, while excluding (the change in) inventories from investment, although not from output. When investment is defined as including inventories, but especially durables, as in most of the literature, it becomes more volatile and more procyclical. Consequently, investment adjustment costs decline substantially and the investment shock becomes the fundamental driving force of fluctuations at business cycle frequencies. To demonstrate that theseThis paper studies the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. The model shows that shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and technological frictions are key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing. The model includes shocks to total factor productivity (neutral technology shock), marginal productivity of investment (investment shock), and desired wage markups (labor supply shock). It is an ideal laboratory to study the driving forces of fluctuations because it fits competitively with unrestricted VARs, encompasses most views on business cycle sources in a general equilibrium framework, and allows disturbances other than neutral technology shocks to be plausible cyclical forces. In the estimated model, investment shocks account for between 50 and 60 percent of the variance of output and hours at business cycle frequencies and more than 80 percent of that of investment. Neutral technology shocks explain about a quarter of the movements in output and consumption, although only about 10 percent of those in hours. These numbers are close to those estimated by Fisher (2006) within a structural VAR. Labor supply shocks are irrelevant over the business cycle, although they dominate the fluctuations of hours at very low frequencies. This finding is important because labor supply shocks are a key ingredient of many business cycle models, but many economists find them intellectually unappealing. According to our results, these disturbances can be ignored when studying business cycles, although they are necessary to account for the low level of hours worked in the seventies and early eighties. Other papers in the literature study the sources of fluctuations in empirical medium-scale DSGE models. In particular, Smets and Wouters (2007) present an analysis of the driving forces of output as one of the applications of their estimated model of the U.S. economy. In contrast to our results, however, they conclude that “it is primarily two “supply” shocks, the productivity and the wage mark-up shock, that account for most of the output variations in the medium to long run,” while they find almost no role for the investment shocks beyond the shortest horizons. We show that these conclusions depend on the unusual definition of consumption and investment adopted by Smets and Wouters (2007). They include durable expenditures in consumption, while excluding (the change in) inventories from investment, although not from output. When investment is defined as including inventories, but especially durables, as in most of the literature, it becomes more volatile and more procyclical. Consequently, investment adjustment costs decline substantially and the investment shock becomes the fundamental driving force of fluctuations at business cycle frequencies. To demonstrate that these