US Postwar Macroeconomic Fluctuations Without Indeterminacy

Joshua Brault, Hashmat Khan (), Louis Phaneuf () and Jean Gardy Victor ()
Additional contact information
Louis Phaneuf: Department of Economics, Universite du Quebec a Montreal, https://professeurs.uqam.ca/professeur/phaneuf.louis/
Jean Gardy Victor: Desjardins Group

No 21-01, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We estimate a multi-shock DSGE model with a Bayesian method that differentiates between states of determinacy and indeterminacy. Determinacy is statistically preferred to indeterminacy before and after 1980. Key to this finding is a Taylor rule wherein the Fed targets output growth relative to trend instead of the level of the output gap or a mix of output gap and output growth. This allows us to revisit postwar macroeconomic fluctuations without indeterminacy. Relative to the pre-1980s, we find that the post-1983 contribution of shocks to the marginal efficiency of investment to the cyclical variance of output growth fell from 50% in the pre-1980s to 20% during the Great Moderation. Greater nominal wage flexibility was a main source of decline in the volatility of output and working hours during the Great Moderation, a finding which appears consistent with the post-1980 large deunionization in the private sector. Lower inflation variability resulted mostly from the Fed’s hawkish stance against inflation and changes in preference parameters. Lower trend inflation and smaller shocks were not major factors driving the Great Moderation.

Keywords: Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-02-19, Revised 2021-05-25
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-his and nep-mac
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Citations: View citations in EconPapers (1)

Published: Carleton Economics Papers

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