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Tuesday, January 24, 2006

What Explains the Decline in the Volatility of Real GDP Growth?

This is a graph of quarter to quarter growth rates for real GDP in the U.S. since 1947:

Does anything catch your eye? In the mid-1980s (some narrow it down to first quarter of 1984), the variance of GDP growth declines substantially, by 50%. The source of the decline is not completely clear. This NBER paper uses cross-country evidence to help to settle whether it was from better technology, better policy, a run of good luck where no big shocks hit the economy, financial innovation, or some other explanation:

Assessing the Sources of Changes in the Volatility of Real Growth, Stephen G. Cecchetti, Alfonso Flores-Lagunes, and Stefan Krause, NBER WP 11946, January 2006: Abstract In much of the world, growth is more stable than it once was. Looking at a sample of twenty five countries, we find that in sixteen, real GDP growth is less volatile today than it was twenty years ago. And these declines are large, averaging more than fifty per cent. What accounts for the fact that real growth has been more stable in recent years? We survey the evidence and competing explanations and find support for the view that improved inventory management policies, coupled with financial innovation, adopting an inflation targeting scheme and increased central bank independence have all been associated with more stable real growth. Furthermore, we find weak evidence suggesting that increased commercial openness has coincided with increased output volatility. [Open link to paper]

    Posted by on Tuesday, January 24, 2006 at 10:19 AM in Academic Papers, Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (9)


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