The Changing Cyclical Variability of Economic Activity in the United States
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.
|Date of creation:||Sep 1984|
|Date of revision:|
|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.|
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- 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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- Robert J. Gordon, 1980. "A Consistent Characterization of a Near-Century of Price Behavior," NBER Working Papers 0455, National Bureau of Economic Research, Inc.
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- 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.
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