Number: RL33959
Title: Why Has the Economy Become Less Volatile?
Authors: Marc Labonte, Government and Finance Division 
Abstract: Congress is concerned with the health of the U.S. economy, which affects the living standards of all Americans. The 2001 recession was unusually mild and brief by historical standards. At 120 months, the expansion that preceded it had been the longest in U.S. history. Is this a coincidence? A body of research concludes that it is not. Since 1984, the volatility of economic growth has fallen by more than half. Before 1984, the fluctuations in quarterly growth rates were much more extreme from one quarter to the next. After 1984, the changes from quarter to quarter have become much smoother. There are three competing explanations for what economists have called the "great moderation." One theory is that structural changes have made the economy less volatile. Changes in the structure of the economy include a smaller manufacturing sector, better inventory management, financial innovations, and deregulation. Most economists have concluded that the shift in production across different sectors since 1984 has not been large enough to account for most of the great moderation.
Pages: 12
Date: August 1, 2008