Working Paper: NBER ID: w14048
Authors: Steven J. Davis; James A. Kahn
Abstract: We review evidence on the Great Moderation in conjunction with evidence about volatility trends at the micro level. We combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences. The key ingredients are declines in firm-level volatility and aggregate volatility -- most dramatically in the durable goods sector -- but the absence of a 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.
Keywords: Great Moderation; Volatility; Economic Activity; Supply Chain Management; Household Consumption
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| improved supply chain management (M11) | reduction in aggregate volatility (E19) |
| decline in firm-level volatility (D25) | reduction in aggregate volatility (E19) |
| decline in firm-level volatility (D25) | great moderation (Z12) |
| reduction in aggregate volatility (E19) | great moderation (Z12) |
| absence of decline in household consumption volatility (D19) | complexity in relationship between aggregate and micro-level volatility (E10) |
| absence of decline in individual earnings uncertainty (D89) | complexity in relationship between aggregate and micro-level volatility (E10) |
| efficiency gains (D61) | reduction in high-frequency short-term fluctuations (E32) |