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Macroeconomic implications of changes in micro volatility

Steven Davis () and James Kahn ()

Proceedings, 2007, issue Nov

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 of the story are declines in firm-level volatility and aggregate volatility – most dramatically in the durable goods sector – but the absence of a decline in the volatility of household consumption and individual earnings. Our explanation for volatility reduction stresses improved supply chain management, particularly in the durable goods sector, and a shift in production and employment from goods to services. We also provide some evidence for a specific mechanism, namely shorter lead times for materials orders. The tentative conclusion we draw is that, although better supply chain management involves potentially large efficiency gains with first-order effects on welfare, it does not imply (nor is there much evidence for) a reduction in uncertainty faced by individuals.

Date: 2007
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Handle: RePEc:fip:fedfpr:y:2007:i:nov:x:7