Maturing Capitalism And Economic Stabilization: International Evidence

Abstract

Recent literature has found that the US business cycle has experienced a substantial decrease in volatility since the mid-1980s. Most authors have considered this as a recent phenomenon particular to the US, which narrows the search for potential causes. In this paper we go one step further and investigate whether this recent change is unique to the US and a phenomenon particular to the 1980s alone or if this is part of a long run trend in volatility shared by several countries. In particular, we examine whether maturing capitalism has engendered a continuous stabilization of business cycles in eleven industrialized countries over time. We do not try to quantify changes in volatility pre and post-War, which could be compromised by differences in the quality of the data. Instead, we focus on examining structural changes in the long run trend of volatility in these countries. Recursive stabilization tests are applied to examine breaks in the volatility of production in these countries, assuming that their dates are unknown. We find strong evidence of multiple structural breaks leading to more stability in these countries over time, and that the recent decrease in US output volatility is part of a broader long-term trend shared by all industrialized countries studied.