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Macroeconomic implications of changes in micro volatility

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  • Steven J. Davis
  • James A. Kahn

Abstract

We review evidence on the Great Moderation in conjunction with evidence about volatility trends at the micro level. We combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences. The key ingredients of the story are declines in firm-level volatility and aggregate volatility – most dramatically in the durable goods sector – but the absence of a decline in the volatility of household consumption and individual earnings. Our explanation for volatility reduction stresses improved supply chain management, particularly in the durable goods sector, and a shift in production and employment from goods to services. We also provide some evidence for a specific mechanism, namely shorter lead times for materials orders. The tentative conclusion we draw is that, although better supply chain management involves potentially large efficiency gains with first-order effects on welfare, it does not imply (nor is there much evidence for) a reduction in uncertainty faced by individuals.

Suggested Citation

  • Steven J. Davis & James A. Kahn, 2007. "Macroeconomic implications of changes in micro volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  • Handle: RePEc:fip:fedfpr:y:2007:i:nov:x:7
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