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The Great Diversification and its Undoing

  • Xavier Gabaix

    (NYU Stern)

  • Vasco M. Carvalho

    (CREI)

This paper investigates whether the secular process of Structural Change - i.e. the broad shift away from manufacturing and towards services during the post war period - can simultaneously account for the Great Moderation and provide a mechanism for its unraveling. Based on detailed US sectoral output data, this paper (i) shows a U-shaped evolution of sectoral shares' concentration for the US and links it to the process of structural change; (ii) shows that the 1980s and 1990s correspond to the period of lowest technological concentration and that the rising shares of financial services, real estate and other business services explain the bulk of the upswing in technological concentration occurring during the 2000s and (iii) shows that the diversification occurring during the 1980s and 1990s is able to explain around half of the decline in aggregate TFP volatility. We then integrate these insights in a quantitative multi-sector business cycle model to show that the observed trends in technological diversification account for a third of the Great Moderation. The paper concludes by taking a closer look to the sources and effects of the observed upswing in technological concentration in the late 1990s and 2000s and discusses whether a return to higher aggregate volatility levels observed is possible.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 880.

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Date of creation: 2010
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Handle: RePEc:red:sed010:880
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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