The Long and Large Decline in U.S. Output Volatility

Abstract

The last two U.S. expansions have been unusually long. One view is that this is the result of luck, of an absence of major adverse shocks over the last twenty years. We argue that more is at work, namely a large underlying decline in output volatility. This decline is not a recent development, but rather a steady one, visible already in the 1950s and the 1960s, interrupted in the 1970s and early 1980s, with a return to trend in the late 1980s and the 1990s. The standard deviation of quarterly output growth has declined by a factor of 3 over the period. This is more than enough to account for the increased length of expansions. We reach two other conclusions. First, the trend decrease can be traced to a number of proximate causes, from a decrease in the volatility in government spending early on, to a decrease in consumption and investment volatility throughout the period, to a change in the sign of the correlation between inventory investment and sales in the last decade. Second, there is a strong relation between movements in output volatility and inflation volatility. This association accounts for the interruption of the trend decline in output volatility in the 1970s and early 1980s.