The Long and Large Decline in U.S. Output Volatility

By Blanchard, Olivier; Simon, John | Brookings Papers on Economic Activity, Spring 2001 | Go to article overview

The Long and Large Decline in U.S. Output Volatility


Blanchard, Olivier, Simon, John, Brookings Papers on Economic Activity


SINCE THE EARLY 1980S the U.S. economy has gone through two long expansions. The first, from 1982 to 1990, lasted thirty-one quarters. The second started in 1991 and, although showing signs of faltering, has recorded its fortieth quarter as this volume goes to press and is already the longest U.S. expansion on record.

One view is that these two long expansions are simply the result of luck, of an absence of major adverse shocks over the last twenty years. We argue that more has been at work, namely, a large underlying decline in output volatility. Furthermore, we contend, this decline is not a recent development--the by-product of a "New Economy" or of Alan Greenspan's talent. Rather it has been a steady decline over several decades, which started in the 1950s (or earlier, but lack of consistent data makes this difficult to establish), was interrupted in the 1970s and early 1980s, and returned to trend in the late 1980s and the 1990s.(1) The magnitude of the decline is substantial: the standard deviation of quarterly output growth has declined by a factor of three over the period. This is more than enough to account for the increased length of expansions.

Having established this fact, we reach two other conclusions. First, the decrease in volatility can be traced to a number of proximate causes, from a decrease in the volatility of government spending early on, to a decrease in consumption and investment volatility throughout the period, to a change in the sign of the correlation between inventory investment and sales in the last decade. Second, there is a strong relationship between movements in output volatility and movements in inflation volatility. The interruption of the trend decline in output volatility in the 1970s was associated with a large increase in inflation volatility; the return to trend is associated with the decrease in inflation volatility since then.

This paper is organized as follows. We start by documenting our basic fact, namely, the secular decrease in output volatility. We then look at the stochastic process for GDP and show that this decrease in volatility can be traced primarily to a decrease in the standard deviation of output shocks, rather than to a change in the dynamics of output. Finally, we show how this decrease in the standard deviation of shocks accounts for the increased length of expansions.

We then take up the question of whether recessions are special, in a way that the formalization used earlier does not do justice to. Put another way, we ask whether what we have seen over the last twenty years is simply the absence of large shocks and nothing more. We show that this is not the case. The measured decrease in output volatility has little to do with the absence of large shocks in the recent past.

We then turn to the relationship between output volatility and inflation. We show that there is a strong relationship both between output volatility and the level of inflation, and between output volatility and inflation volatility. Both volatilities went up in the 1970s and have come down since. Correlation does not, however, imply causality. The correlation in both periods may have been due to third factors, such as supply shocks in the 1970s. This leads us to consider evidence from the other members of the Group of Seven (G-7) large industrial countries. Our motivation here is that the different timings of disinflation across these countries can help us separate out the effects of inflation from those of supply shocks. We first show that these other countries have also experienced a decline in output volatility, although with some differences in timing and in magnitude. (An interesting exception is Japan, where a decline in output volatility has been reversed since the late 1980s.) We then show that, even after controlling for common time fixed effects, inflation volatility still appears to be strongly related to output volatility.

As a matter of accounting, the decline in output volatility can be traced either to changes in the composition of output or to changes in the variances and covariances of its underlying components. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Long and Large Decline in U.S. Output Volatility
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.