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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.|
|Document Type:||Working Paper|
|Appears in Collections:||Staff Reports, Federal Reserve Bank of New York|
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