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

41 Pages Posted: 25 Jul 2008

See all articles by Steven J. Davis

Steven J. Davis

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

James A. Kahn

Yeshiva University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2008

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.

Keywords: Great Moderation, inventories, monetary policy, volatility

JEL Classification: E20, E32

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: https://ssrn.com/abstract=1166556 or http://dx.doi.org/10.2139/ssrn.1166556

Steven J. Davis

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James A. Kahn (Contact Author)

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States
212-340-7863 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
98
rank
240,711
Abstract Views
1,151
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information