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Recent U.S. macroeconomic stability: good policies, good practices or good luck?

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  • Shaghil Ahmed
  • Andrew T. Levin
  • Beth Anne Wilson

Abstract

The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the \"good-luck\" hypothesis as the leading explanation for the decline in aggregate output volatility, although \"good-practices\" and \"good-policy\" are also contributing factors. Applying the same methods to consumer price inflation, we find that the post-1984 decline in inflation volatility can be attributed largely to improvements in monetary policy.

Suggested Citation

  • Shaghil Ahmed & Andrew T. Levin & Beth Anne Wilson, 2002. "Recent U.S. macroeconomic stability: good policies, good practices or good luck?," International Finance Discussion Papers 730, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:730
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    References listed on IDEAS

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    Keywords

    Inflation (Finance); Monetary policy;

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