International Finance Discussion Papers (IFDP)
July 2002 (Revised July 2004)
Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?
Shaghil Ahmed, Andrew Levin, and Beth Anne Wilson
Abstract:
The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the "good-luck" hypothesis as the leading explanation for the decline in aggregate output volatility, although "good-practices" and "good-policy" are also contributing factors. Applying the same methods to consumer price inflation, we find that the post-1984 decline in inflation volatility can be attributed largely to improvements in monetary policy.
Keywords: GDP volatility, inflation stabilization, business cycles, frequency domain
PDF: Full Paper
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