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The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations

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Author Info
Chang-Jin Kim
Charles Nelson
Jeremy Piger

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Abstract

Using Bayesian tests for a structural break at an unknown break date, we search for a volatility reduction within the post-war 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 1980's, 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 aggregate final sales mirroring that in aggregate real GDP. 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. In addition to the volatility reduction in real GDP, we document structural breaks in the volatility and persistence of inflation and interest rates occurring over a similar time frame as the volatility reduction in real GDP.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 707.

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Date of creation: 2001
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Keywords: Econometric models Business cycles

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