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| Title: | | Interpreting the great moderation: Changes in the volatility of economic activity at the macro and micro levels  |
| Authors: | | Davis, Steven J. Kahn, James A. |
| Issue Date: | | 2008 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 334 |
| 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. |
| Subjects: | | Great Moderation inventories monetary policy volatility |
| JEL: | | E20 E32 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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