Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?

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.