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The Changing Cyclical Variability of Economic Activity in the United States

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  • J. Bradford De Long
  • Lawrence H. Summers

Abstract

This paper examines the changing cyclical variability of economic activity in the United States. It first shows that the decline in variability since World War II cannot be explained by changes in the composition of economic activity or by the avoidance of financial panics. We then show that increased automatic stabilization by the government, and the increased availability of private credit after World War II combined to stabilize consumption and reduce the variability of aggregate demand. The main argument of the paper holds that greater price rigidity in recent times may have contributed to economic stability by preventing destabilizing deflations and inflations. Empirical evidence is presented to support this proposition.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1450.

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Date of creation: Sep 1984
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Publication status: published as From The American Business Cycle: Continuity and Change, edited by Robert J. Gordon, pp. 679-719 AND 732-734. Chicago: University of Chicago Press, 1986.
Handle: RePEc:nbr:nberwo:1450

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  1. Blanchard, Olivier J, 1981. "What Is Left of the Multiplier Accelerator?," American Economic Review, American Economic Association, vol. 71(2), pages 150-54, May.
  2. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  3. Gordon, Robert J, 1980. "A Consistent Characterization of a Near-Century of Price Behavior," American Economic Review, American Economic Association, vol. 70(2), pages 243-49, May.
  4. Charles L. Schultze, 1981. "Some Macro Foundations for Micro Theory," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 521-592.
  5. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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