Declines in the Volatility of the US Economy; A Detailed Look

This paper uses GDP-by-state and industry data, and looks at the decline in volatility of the U.S. economy that occurred in about 1984. It finds that this decline primarily results from declines in covariances between industries, or between states, rather than declines in variances of the individual industries or states. Similarly, it finds that changing shares of more- and less-volatile industries account for little of the overall decline in volatility. It suggests that some of the general explanations suggested by some analysts—such as better inventory management or improved labor markets—are best suited for specific industries or industry groups, rather than the overall economy. General explanations that would tend to work in many industries—such as better business planning due to lower price volatility or improved information technology—might account for much of the decline in overall volatility. Nevertheless, many industries experienced increased volatility. The paper also takes a brief look at the earlier, very large decline in volatility that occurred after the era of the great depression and World War II, and suggests that institutional factors have historically been important in determining volatility.