Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60968
Authors: 
Davis, Steven J.
Kahn, James A.
Year of Publication: 
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

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