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A State-Level Analysis of the Great Moderation

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  • Michael T. Owyang

    ()
    (Research Department Federal Reserve Bank of St Louis)

  • Jeremy Piger

    (Research Department Federal Reserve Bank of St Louis)

  • Howard J. Wall

    (Research Department Federal Reserve Bank of St Louis)

  • Federal Reserve Bank of St. Louis

Abstract

A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data, find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-significant reduction in volatility. We then exploit this cross-sectional heterogeneity to evaluate three hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively higher manufacturing concentration experience later breaks, a result that tends to contradict improved inventory management and a decline in the volatility of productivity shocks as possible explanations. Our results, then, are more consistent with monetary policy as the origin of the aggregate volatility reduction

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 131.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:131

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Keywords: disaggregation; volatility reduction; Markov-switching;

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