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Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro Levels

Steven Davis () and James Kahn ()

No 334, Staff Reports from Federal Reserve Bank of New York

Abstract: We review evidence on the Great Moderation together with evidence about volatility trends at the micro level to develop a potential explanation for the decline in aggregate volatility since the 1980s and its consequences. The key elements are declines in firm-level volatility and aggregate volatility - most dramatically in the durable goods sector - but with no decline in household consumption volatility and individual earnings uncertainty. Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services. We provide evidence that better inventory control made a substantial contribution to declines in firm-level and aggregate volatility. Consistent with this view, if we look past the turbulent 1970s and early 1980s, much of the moderation reflects a decline in high-frequency (short-term) fluctuations. While these developments represent efficiency gains, they do not imply (nor is there evidence for) a reduction in economic uncertainty faced by individuals and households.>

Keywords: Business cycles; Consumption (Economics); Durable goods, Consumer; Service industries; Households - Economic aspects (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mac
Date: 2008
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Journal Article: Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels (2008) Downloads
Working Paper: Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels (2008) Downloads
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