A State-Level Analysis of the Great Moderation

Federal Reserve Bank of St. Louis Working Paper No. 2007-003D

32 Pages Posted: 6 Feb 2007  

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Jeremy Piger

University of Oregon - Department of Economics

Howard J. Wall

Lindenwood University - Center for Economics and the Environment

Date Written: May 1, 2008

Abstract

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.

Keywords: volatility reduction, state business cycles

JEL Classification: R11, E32

Suggested Citation

Owyang, Michael and Piger, Jeremy and Wall, Howard J., A State-Level Analysis of the Great Moderation (May 1, 2008). Available at SSRN: https://ssrn.com/abstract=960818 or http://dx.doi.org/10.2139/ssrn.960818

Michael T. Owyang (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jeremy M. Piger

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

Howard J. Wall

Lindenwood University - Center for Economics and the Environment ( email )

209 S. Kingshighway
St. Charles, MO 63301
United States

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