A State-Level Analysis of the Great Moderation

A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data, find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-significant reduction in volatility. We then exploit this cross-sectional heterogeneity to evaluate three hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively higher manufacturing concentration experience later breaks, a result that tends to contradict improved inventory management and a decline in the volatility of productivity shocks as possible explanations. Our results, then, are more consistent with monetary policy as the origin of the aggregate volatility reduction