Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?

55 Pages Posted: 20 Jan 2003

See all articles by Shaghil Ahmed

Shaghil Ahmed

Board of Governors of the Federal Reserve System

Andrew T. Levin

affiliation not provided to SSRN

Beth Anne Wilson

Board of Governors of the Federal Reserve System

Date Written: July 2002

Abstract

The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the "good-luck" hypothesis as the leading explanation for the decline in aggregate output volatility, although "good-practices" and "good-policy" are also contributing factors. Applying the same methods to consumer price inflation, we find that the post-1984 decline in inflation volatility can be attributed largely to improvements in monetary policy.

Keywords: GDP volatility, inflation stabilization, business cycles, frequency domain

JEL Classification: E32, E31, E52

Suggested Citation

Ahmed, Shaghil and Levin, Andrew and Wilson, Beth Anne, Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck? (July 2002). Available at SSRN: https://ssrn.com/abstract=320780 or http://dx.doi.org/10.2139/ssrn.320780

Shaghil Ahmed (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC
United States

Andrew Levin

affiliation not provided to SSRN

Beth Anne Wilson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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