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The Long and Large Decline in U.S. Output Volatility

41 Pages Posted: 25 Jul 2001  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

John A. Simon

Reserve Bank of Australia - Economic Research

Date Written: April 2001

Abstract

The last two U.S. expansions have been unusually long. One view is that this is the result of luck, of an absence of major adverse shocks over the last twenty years. We argue that more is at work, namely a large underlying decline in output volatility. This decline is not a recent development, but rather a steady one, visible already in the 1950s and the 1960s, interrupted in the 1970s and early 1980s, with a return to trend in the late 1980s and the 1990s. The standard deviation of quarterly output growth has declined by a factor of 3 over the period. This is more than enough to account for the increased length of expansions.

We reach two other conclusions. First, the trend decrease can be traced to a number of proximate causes, from a decrease in the volatility in government spending early on, to a decrease in consumption and investment volatility throughout the period, to a change in the sign of the correlation between inventory investment and sales in the last decade. Second, there is a strong relation between movements in output volatility and inflation volatility. This association accounts for the interruption of the trend decline in output volatility in the 1970s and early 1980s.

Keywords: output volatility, recession, expansion, fluctuations, amplitude

JEL Classification: E30, E32

Suggested Citation

Blanchard, Olivier J. and Simon, John A., The Long and Large Decline in U.S. Output Volatility (April 2001). MIT Dept. of Economics Working Paper No. 01-29. Available at SSRN: https://ssrn.com/abstract=277356 or http://dx.doi.org/10.2139/ssrn.277356

Olivier Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

John Simon

Reserve Bank of Australia - Economic Research ( email )

GPO Box 3947
Sydney, NSW 2001
Australia

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