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A state-level analysis of the Great Moderation

Michael Owyang (), Jeremy Piger () and Howard Wall ()

No 2007-003, Working Papers from Federal Reserve Bank of St. Louis

Abstract: A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data and find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-important reductions in volatility. We then exploit this cross sectional heterogeneity to evaluate hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively high concentrations in the durable-goods and extractive industries tended to experience later breaks. We interpret these results as contradictory to hypotheses that the Great Moderation could have been caused by improved inventory management or less-volatile shocks to energy and/or productivity. Instead, we find results that are more consistent with the view that the most significant contributor to the volatility reduction was improved monetary policy.

Keywords: Macroeconomics; Econometric models; Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mac
Date: 2007
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Journal Article: A state-level analysis of the Great Moderation (2008) Downloads
Working Paper: A State-Level Analysis of the Great Moderation (2006) Downloads
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