TY  - JOUR
AU  - Davis,Steven J.
AU  - Kahn,James A.
TI  - Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14048
PY  - 2008
Y2  - May 2008
UR  - http://www.nber.org/papers/w14048
L1  - http://www.nber.org/papers/w14048.pdf
N1  - Author contact info:
Steven J. Davis
Booth School of Business
The University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-7312
Fax: 773/834-0733
E-Mail: Steven.Davis@ChicagoBooth.edu

James Kahn
Economics Department
Yeshiva University
Belfer Hall, 5th Floor
500 W. 185th St
New York, NY 10033
Tel: 212-960-5400 x6964
Fax: 212-960-0846
E-Mail: jkahn1@yu.edu
AB  - We review evidence on the Great Moderation in conjunction with evidence about volatility trends at the micro level.  We combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences.   The key ingredients are declines in firm-level volatility and aggregate volatility -- most dramatically in the durable goods sector -- but the absence of a decline in household consumption volatility and individual earnings uncertainty.  Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services.  We provide evidence that better inventory control made a substantial contribution to declines in firm-level and aggregate volatility.  Consistent with this view, if we look past the turbulent 1970s and early 1980s much of the moderation reflects a decline in high frequency (short-term) fluctuations.  While these developments represent efficiency gains, they do not imply (nor is there evidence for) a reduction in economic uncertainty faced by individuals and households.
ER  -