Working Paper: CEPR ID: DP6632
Authors: Jordi Gal; Luca Gambetti
Abstract: The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labour productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes.
Keywords: Great Moderation; Labour Hoarding; Monetary Policy Rules; Structural VARs; Technology Shocks
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| non-technology shocks (E39) | decline in output volatility (E32) |
| non-technology shocks (E39) | vanishing procyclical response of labor productivity (O49) |
| structural changes in the economy (L16) | lower correlation between hours and labor productivity (J29) |
| technology shocks (D89) | increasing contribution to output volatility (F62) |
| shift in the response of output and hours (J29) | contribution of technology shocks to output volatility (O49) |
| correlation between labor productivity and hours (J24) | shift from procyclical to countercyclical (E63) |
| evolution of shocks (E32) | affecting transmission mechanisms in the economy (F42) |