TY  - JOUR
AU  - Arias,Andres
AU  - Hansen,Gary D.
AU  - Ohanian,Lee E.
TI  - Why Have Business Cycle Fluctuations Become Less Volatile?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12079
PY  - 2006
Y2  - March 2006
UR  - http://www.nber.org/papers/w12079
L1  - http://www.nber.org/papers/w12079.pdf
N1  - Author contact info:
Andres Arias

Gary Hansen
UCLA
Department of Economics
8283 Bunche Hall
Box 951477
Los Angeles, CA 90095
Tel: 310/825-3847
Fax: 310/825-9528
E-Mail: ghansen@econ.ucla.edu

Lee E. Ohanian
8283 Bunch Hall
UCLA, Department of Economics
Box 951477
Los Angeles, CA  90095
Tel: 310/825-0979
Fax: 310/825-9528
E-Mail: ohanian@econ.ucla.edu
AB  - This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50 percent decline in cyclical volatility of output and its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household's first order condition for labor, and shocks that affect the household's first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model.
ER  -