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

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  • Chang-Jin Kim
  • Charles Nelson
  • Jeremy M. Piger

Abstract

Using a Bayesian model comparison strategy, 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 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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-016.

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Date of creation: 2003
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Publication status: Published in Journal of Business and Economic Statistics, January 2004, 22(1), pp. 80-93
Handle: RePEc:fip:fedlwp:2001-016

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Keywords: Econometric models ; Business cycles;

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  1. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc.
  2. Diebold, Francis X. & Chen, Celia, 1996. "Testing structural stability with endogenous breakpoint A size comparison of analytic and bootstrap procedures," Journal of Econometrics, Elsevier, vol. 70(1), pages 221-241, January.
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  10. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 395-432, July.
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  12. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  13. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  14. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February.
  15. Christina D. Romer, 1999. "Changes in Business Cycles: Evidence and Explanations," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 23-44, Spring.
  16. Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
  17. Shaghil Ahmed & Andrew Levin & Beth Anne Wilson, 2004. "Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 824-832, August.
  18. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  19. Fama, Eugene F., 1992. "Transitory variation in investment and output," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 467-480, December.
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