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Why has output become less volatile?

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  • Bharat Trehan

Abstract

Over the past twenty years, output growth in the U.S. has become noticeably less volatile. During that time, the economy has experienced two recessions, compared with four in each of the two preceding twenty year periods. Further, the loss in output during the last two recessions has been smaller than what prior experience would lead one to expect. Moreover, the reduction in output volatility is not confined to business cycle frequencies. ; Does the reduction in volatility represent some kind of fundamental, structural change in the economy? Or is it the result of good policy? Or is it the result of good luck? These are the questions that economists are debating in the research literature. Several different arguments have been put forward, but as yet there is no agreement on the cause or causes for the reduced volatility. This Economic Letter reviews and discusses these arguments.

Suggested Citation

  • Bharat Trehan, 2005. "Why has output become less volatile?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep16.
    • Handle: RePEc:fip:fedfel:y:2005:i:sep16:n:2005-24
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    References listed on IDEAS

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    1. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January.
    2. Glenn D. Rudebusch & Tao Wu, 2007. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 395-422, March.
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