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Volatility accounting: a production perspective on increased economic stability

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  • Kevin J. Stiroh

Abstract

This paper examines the declining volatility of U.S. output growth from a production perspective. At the aggregate level, increased output stability reflects decreased volatility in both labor productivity growth and hours growth as well as a significant decline in the correlation. The decline in output volatility can also be traced to less volatile labor input and total factor productivity (TFP) growth and the smaller covariance between them. This relationship suggests that labor market changes such as increased labor market flexibility are an important source of increased output stability. At the industry level, the decline in volatility appears widespread, with about 80 percent of component industries showing smaller contributions to aggregate output volatility after 1984, although most of the aggregate decline reflects smaller covariances between industries. Across industries, there is strong evidence of a decline in the correlation between hours growth and labor productivity growth, suggesting again that the labor market dynamics are part of the decline in U.S. output volatility.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 245.

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Date of creation: 2006
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Handle: RePEc:fip:fednsr:245

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Keywords: Production (Economic theory) ; Productivity ; Labor productivity ; Labor market ; Industries;

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Cited by:
  1. Posch, Olaf, 2011. "Explaining output volatility: The case of taxation," Journal of Public Economics, Elsevier, vol. 95(11), pages 1589-1606.
  2. Galí, Jordi & Gambetti, Luca, 2008. "On the Sources of the Great Moderation," CEPR Discussion Papers 6632, C.E.P.R. Discussion Papers.
  3. Chun, Hyunbae & Kim, Jung-Wook, 2010. "Declining output growth volatility: A sectoral decomposition," Economics Letters, Elsevier, vol. 106(3), pages 151-153, March.
  4. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2005. "Can financial innovation help to explain the reduced volatility of economic activity?," Finance and Economics Discussion Series 2005-54, Board of Governors of the Federal Reserve System (U.S.).
  5. Ko, Jun-Hyung & Murase, Koichi, 2013. "Great Moderation in the Japanese economy," Japan and the World Economy, Elsevier, vol. 27(C), pages 10-24.
  6. Cantore, C. & Ferroni, F. & León-Ledesma, M A., 2011. "Interpreting the Hours-Technology time-varying relationship," Working papers 351, Banque de France.
  7. Zied Ftiti, 2010. "Stabilité-croissance et performance économique : Quelle relation selon une revue de la littérature ?," Working Papers 1026, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  8. William Hawkins, 2012. "Wage Determination and Labor Market Volatility under Mismatch," 2012 Meeting Papers 797, Society for Economic Dynamics.
  9. R. Jason Faberman, 2008. "Job flows, jobless recoveries, and the Great Moderation," Working Papers 08-11, Federal Reserve Bank of Philadelphia.
  10. Tim Willems & Sweder van Wijnbergen, 2009. "Imperfect Information, Lagged Labor Adjustment and the Great Moderation," Tinbergen Institute Discussion Papers 09-063/2, Tinbergen Institute, revised 18 Apr 2012.
  11. Christian Calmès & Raymond Théoret, 2008. "Banking Deregulation and Financial Stability : is it Time to re-regulate in Canada ?," RePAd Working Paper Series UQO-DSA-wp042008, Département des sciences administratives, UQO.
  12. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
  13. Mary C. Daly & John G. Fernald & Òscar Jordà & Fernanda Nechio, 2013. "Okun’s macroscope and the changing cyclicality of underlying margins of adjustment," Working Paper Series 2013-32, Federal Reserve Bank of San Francisco.
  14. Francesco Nucci & Marianna Riggi, 2011. "Performance pay and shifts in macroeconomic correlations," Temi di discussione (Economic working papers) 800, Bank of Italy, Economic Research and International Relations Area.

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