A State-Level Analysis of the Great Moderation
Federal Reserve Bank of St. Louis - Research Division
University of Oregon - Department of Economics
Howard J. Wall
Lindenwood University - Institute for Study of Economics and the Environment
May 1, 2008
Federal Reserve Bank of St. Louis Working Paper No. 2007-003D
A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s, i.e., the "Great Moderation." This paper documents the Great Moderation at the state level, finding significant heterogeneity in the timing and magnitude of states' structural breaks. For example, we find that 14 states had breaks that occurred at least three years before or after the aggregate break, while another 11 states did not experience any statistically important break during the period. Volatility reductions were positively related to the initial level of volatility, durable-goods share, and per capita energy consumption; and negatively related to average firm size, bank-branch deregulation, and increases in the share with a high school diploma. The probability of a state experiencing a break was associated with nondurable-goods share, energy consumption, and demographics. We use these results to examine the plausibility of several explanations of the Great Moderation.
Number of Pages in PDF File: 32
Keywords: volatility reduction, state business cycles
JEL Classification: R11, E32working papers series
Date posted: February 6, 2007
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