On the Causes of the Increased Stability of the U.S. Economy

The volatility of real GDP growth in the United States hasfallen by half since the early 1980s relative to the priorpostwar experience.1 Inflation also stabilized around then(although only when compared with a shorter period ofvolatility in the 1970s). Some studies have argued that animprovement in U.S. monetary policy around that time canexplain both the lower output and inflation volatility; othershave attributed the decreased volatility of GDP to a reductionin the size of the shocks hitting the U.S. economy—essentially“good luck”—and have attributed the improvement on theinflation front to better policy.2In this paper, we argue that changes in inventory behaviorstemming from improvements in information technology (IT)have played a direct role in reducing real output volatility. Ourrationale is that even if the magnitude of the exogenous shockshitting the economy has not changed, the role of inventoryinvestment in magnifying or propagating those shocks hasmoderated significantly. Thus, even a large swing in final demandwould be expected to produce a smaller swing in productionnow than it would have twenty or thirty years ago. We arguefurther that this implies a more modest role for both luck andimproved monetary policy in stabilizing output, althoughpolicy remains the likely source of reduced inflation volatility...