Abstract

http://ssrn.com/abstract=1166556
 
 

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Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels


Steven J. Davis


University of Chicago; National Bureau of Economic Research (NBER)

James A. Kahn


Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

July 2008

FRB of New York Staff Report No. 334

Abstract:     
We review evidence on the Great Moderation together with evidence about volatility trends at the micro level to develop a potential explanation for the decline in aggregate volatility since the 1980s and its consequences. The key elements are declines in firm-level volatility and aggregate volatility - most dramatically in the durable goods sector - but with no decline in household consumption volatility and individual earnings uncertainty. Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services. We provide evidence that better inventory control made a substantial contribution to declines in firm-level and aggregate volatility. Consistent with this view, if we look past the turbulent 1970s and early 1980s, much of the moderation reflects a decline in high-frequency (short-term) fluctuations. While these developments represent efficiency gains, they do not imply (nor is there evidence for) a reduction in economic uncertainty faced by individuals and households.

Number of Pages in PDF File: 41

Keywords: Great Moderation, inventories, monetary policy, volatility

JEL Classification: E20, E32


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Date posted: July 25, 2008  

Suggested Citation

Davis, Steven J. and Kahn, James A., Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels (July 2008). FRB of New York Staff Report No. 334. Available at SSRN: http://ssrn.com/abstract=1166556 or http://dx.doi.org/10.2139/ssrn.1166556

Contact Information

Steven J. Davis
University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

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National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
James A. Kahn (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-1948 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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