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Why Have Business Cycle Fluctuations Become Less Volatile?

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Author Info
Andres Arias
Gary D. Hansen
Lee E. Ohanian

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Abstract

This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50 percent decline in cyclical volatility of output and its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household's first order condition for labor, and shocks that affect the household's first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12079.

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Date of creation: Mar 2006
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Handle: RePEc:nbr:nberwo:12079

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E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
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  4. Robert J. Gordon, 2005. "What Caused the Decline in U.S. Business Cycle Volatility?," NBER Working Papers 11777, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  6. Jeffrey R. Campbell & Zvi Hercowitz, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," NBER Working Papers 11330, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June. [Downloadable!] (restricted)
  8. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April. [Downloadable!] (restricted)
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  9. Sylvain Leduc & Keith Sill, 2003. "Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility," Working Papers 03-22, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  10. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202. [Downloadable!]
  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
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  13. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  14. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January. [Downloadable!] (restricted)
  15. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-74, December. [Downloadable!] (restricted)
  16. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Taubman, Paul & Wilkinson, Maurice, 1970. "User Cost, Capital Utilization and Investment Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(2), pages 209-15, June. [Downloadable!] (restricted)
  19. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fuentes-Albero, Cristina, 2007. "Technology Shocks, Statistical Models, and The Great Moderation," MPRA Paper 3589, University Library of Munich, Germany. [Downloadable!]
  2. Sylvain Leduc & Keith Sill, 2006. "Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility," International Finance Discussion Papers 873, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Nir Jaimovich & Henry E. Siu, 2007. "The young, the old, and the restless: demographics and business cycle volatility," Staff Report 387, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Stephen Parente & Anne Villamil, 2007. "Edward C. Prescott’s contributions to economics: guest editors’ introduction," Economic Theory, Springer, vol. 32(1), pages 1-5, July. [Downloadable!] (restricted)
  5. Ioana Moldovan, 2008. "Countercyclical Fiscal Policy and Cyclical Factor Utilization," Working Papers 2008_15, Department of Economics, University of Glasgow. [Downloadable!]
  6. Keith Sill, 2006. "Macroeconomic volatility and the equity premium," Working Papers 06-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
  7. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," NBER Working Papers 14048, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. K Blackburn & D Varvarigos, 2006. "Human Capital Accumulation in a Stochastic Environment: Some New Results on the Relationship Between Growth and Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 74, Economics, The Univeristy of Manchester. [Downloadable!]
  9. Bonpasse, Morrison, 2006. "The Single Global Currency: Common Cents for the World," MPRA Paper 1175, University Library of Munich, Germany. [Downloadable!]
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