What Accounts for the Postwar Decline in Economic Volatility

Keith Sill

Senior Vice President of Research and Director of the Real-Time Data Research Center

First Quarter 2004

Business Review — Over the past 20 years, the U.S. economy has had fewer and shorter recessions. In addition, over time, swings in the growth of many macroeconomic variables, such as gross domestic product, have become smaller. Why this decline in economic volatility?

In this article, Keith Sill highlights some of the facts about the increased stability of the U.S. economy and assesses the contribution of policy and other factors to the decline in volatility.

The U.S. economy appears to have become much more stable in the 1990s and early 2000s than it was in the 1950s, 1960s, and 1970s. We have fewer and shorter recessions, and the swings, over time, in the growth of real gross domestic product (GDP), unemployment, inflation, and a host of other macroeconomic variables have become smaller. Many explanations have been offered for this lower volatility in economic activity. Some are related to changes in the structure of the economy, such as better inventory management and the shift in employment from manufacturing industries to service industries. Some focus on the contribution of changes in monetary and fiscal policy to the increase in economic stability.

This article appeared in the First Quarter 2004 edition of Business Review.

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