The Less Volatile US Economy: A Bayesian Investigation of Timing, Breadth,and Potential Explanations.

Abstract

Using a Bayesian model comparison strategy, we search for a volatility reduction within the postwar sample for the growth rates of U.S. aggregate and disaggregate real GDP. We find that the growth rate of aggregate real GDP has been less volatile since the early 1980s, and that this volatility reduction is concentrated in the cyclical component of real GDP. The growth rates of many of the broad production sectors of real GDP display similar reductions in volatility, suggesting the aggregate volatility reduction does not have a narrow source. We also find a large volatility reduction in measures of final sales in the goods sector. We contrast this evidence to an existing literature documenting an aggregate volatility reduction that is shared by only one narrow sub-component, the production of durable goods, and is not present in final sales. We also document structural breaks in the persistence and conditional volatility of inflation that occurred over a similar time frame as the volatility reduction in real GDP.

The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks in the G-7

“…It is consistent with the view that a change in the relative importance of global (or US) as opposed to idiosyncratic (or European) shocks can largely explain the unexpected increase in the business cycle correlations between European economies and the US at the beginning of the 21 st century, as opposed to the comparative isolation of the two economic blocs during the 1980s (see IMF, 2001, for an account of the unexpected nature of this change). It is also consistent with the view that the "Great Moderation'' experienced in the Western economies in the last two decades may be due to a subsidence of shocks, not necessarily to the effects of better policy-making (see inter alia Benati andMumtaz, 2005, andKim et al, 2004). Finally, the evidence uncovered in this paper is consistent with the observed greater assimilation of the UK cycle to the Continental European one in the most recent period, as evidenced in an increase in the corresponding business cycle cross-correlation (evidence noted in the UK Treasury's "Euro Report''-see HM Treasury, 2003).…”

Inference and prediction in a multiple-structural-break model

“…The focus in this section is on US real gross domestic product (GDP) quarterly growth rates, a common subject of study in this literature (Kim and Nelson, 1999;McConnell and Perez, 2000;Kim et al, 2004;Koop and Potter, 2007;Maheu and Gordon, 2008). Denote by GDP t seasonally adjusted US quarterly real GDP in billions of chained 2000 dollars, obtained from the website of the Bureau of Economic Analysis for 1947Q1 through 2008Q3.…”

A flexible approach to parametric inference in nonlinear and time varying time series models

“…This finding is sometimes referred to as the Great Moderation of the business cycle. For instance, Kim et al (2004) investigate breaks in the volatility of various measures of aggregate activity. For most of the measures they consider, they find strong evidence of an abrupt break in the early 1980s.…”