Recent U.S. macroeconomic stability: good policies, good practices or good luck?

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  • 1 January 2002
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      • Published in RePEc
Abstract
The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the \\"good-luck\\" hypothesis as the leading explanation for the decline in aggregate output volatility, although \\"good-practices\\" and \\"good-policy\\" are also contributing factors. Applying the same methods to consumer price inflation, we find that the post-1984 decline in inflation volatility can be attributed largely to improvements in monetary policy.
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