Why Have Business Cycle Fluctuations Become Less Volatile?

Andres Arias, Gary Hansen and Lee Ohanian

No 12079, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50 percent decline in cyclical volatility of output and its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household's first order condition for labor, and shocks that affect the household's first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model.

JEL-codes: E3 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published as Arias, Andres, Gary D. Hansen and Lee Ohanian. “Why Have Business Cycle Fluctuations Become Less Volatile?” Economic Theory 32 (July 2007): 43-58.

Downloads: (external link)
http://www.nber.org/papers/w12079.pdf (application/pdf)

Related works:
Journal Article: Why have business cycle fluctuations become less volatile? (2007)
Working Paper: Why have business cycle fluctuations become less volatile? (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:12079

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12079

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().