Working Paper: NBER ID: w9127
Authors: James H. Stock; Mark W. Watson
Abstract: From 1960-1983, the standard deviation of annual growth rates in real GDP in the United States was 2.7%. From 1984-2001, the corresponding standard deviation was 1.6%. This paper investigates this large drop in the cyclical volatility OF real economic.activity. The paper has two objectives. The first is to provide a comprehensive characterization of the decline in volatility using a large number of U.S. economic time series and a variety of methods designed to describe time-varying time series processes. In so doing, the paper reviews the literature on the moderation and attempts to resolve some of its disagreements and discrepancies. The second objective is to provide new evidence on the quantitative importance of various explanations for this 'great moderation.' Taken together, we estimate that the moderation in volatility is attributable to a combination of improved policy (20-30%), identifiable good luck in the form of productivity and commodity price shocks (20-30%), and other unknown forms of good luck that manifest themselves as smaller reduced-form forecast errors (40-60%).
Keywords: No keywords provided
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in volatility (E32) | economic environment of the 1990s (P17) |
| moderation in volatility (C58) | reductions in conditional variance in time series models (C22) |
| reduction in volatility (G17) | smaller unforecastable disturbances (D89) |
| reduction in volatility (G17) | changes in how disturbances propagate through the economy (E32) |
| moderation in volatility (C58) | reductions in volatility of structural shocks (C22) |
| break in the mid-1980s (E65) | moderation in volatility (C58) |