Working Paper: NBER ID: w1450
Authors: J. Bradford DeLong; Lawrence H. Summers
Abstract: This paper examines the changing cyclical variability of economic activity in the United States. It first shows that the decline in variability since World War II cannot be explained by changes in the composition of economic activity or by the avoidance of financial panics. We then show that increased automatic stabilization by the government, and the increased availability of private credit after World War II combined to stabilize consumption and reduce the variability of aggregate demand. The main argument of the paper holds that greater price rigidity in recent times may have contributed to economic stability by preventing destabilizing deflations and inflations. Empirical evidence is presented to support this proposition.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased government stabilization and private credit availability (H81) | stabilizing consumption (E21) |
| increased government stabilization and private credit availability (H81) | reducing aggregate demand variability (E19) |
| greater price rigidity (D40) | preventing destabilizing deflations and inflations (E31) |
| greater price rigidity (D40) | contributing to economic stability (E63) |
| increasing role of government (H10) | decline in output variability (D20) |
| increasing role of government (H10) | decline in employment variability (J63) |
| diminished liquidity constraints on consumers (D12) | stabilized consumption patterns (E21) |