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NBER Working Papers and Publications
|March 2006||Why Have Business Cycle Fluctuations Become Less Volatile?|
with Gary D. Hansen, Lee E. Ohanian: w12079
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 househol...
Published: Arias, Andres, Gary D. Hansen and Lee Ohanian. “Why Have Business Cycle Fluctuations Become Less Volatile?” Economic Theory 32 (July 2007): 43-58. citation courtesy of