hobbes
30-07-2002, 17:07
Tuesday, July 30, 2002 Luck takes edge off economy's rises and falls
REUTERS in Washington
Many have praised the brilliance of Alan Greenspan and his predecessor at the Federal Reserve helm for blunting the most savage swings of the United States business cycle. But there is a good chance most of what tamed the booms and tempered the busts was plain old dumb luck.
That is the finding of a paper by three researchers at the central bank's Washington-based Board of Governors who examined what might lie behind a marked decline in the volatility of US economic growth since the mid-1980s.
Many analysts credit the skilful economic steering of Mr Greenspan and inflation-slaying Paul Volcker, who preceded him as Fed chairman, for the improved performance.
Others have said the smoother pattern of growth in US gross domestic product reflected better business practices, particularly the "just in time" speedy inventory management new technologies made possible.
But researchers Shaghil Ahmed, Andrew Levin and Beth Anne Wilson say the apparent flattening of the peaks and valleys in the boom-bust cycle - and the little fits and starts in between - seems to be mostly chance.
"Although better practices and better monetary policies have played some role in explaining the decline of US output volatility in the past 10-15 years, good luck is probably the leading explanation," they said in a paper on the Fed's Web site.
"It might be premature to conclude that the reduction in volatility is a permanent feature of the US economy."
In the US boom years of the 1990s, some had ventured so far as to proclaim the business cycle dead. How alive it is has since become abundantly and painfully clear - just ask the 1.6 million in the US who lost their jobs last year.
Still, there is no dispute that volatility has been lower.
From 1960 through to 1983, annual rates of real gross domestic product growth gyrated wildly from quarter to quarter, with the annual rate dipping as low as minus 8 per cent and spiking as high as plus 15 per cent - a 23 percentage-point swing.
Since then, growth from one quarter to the next has followed a much more even path, with changes in GDP oscillating in a relatively contained 11-point range. What is more, there have been only two recessions, both brief and shallow by historical standards, with the most recent appearing to have ended early this year.
The Fed researchers determined that the volatility of growth had been cut in half. But why? If it had been mostly due to better monetary policy, the downward shift should be most evident in the tempering of business cycle peaks and troughs, while better inventory management would likely smooth growth within a cycle.
But the researchers found volatility reduced in equal proportion whether gauging it over the course of full cycles, or examining the shorter-run changes in GDP in between.
It seemed unlikely that better policy and business practices would have such an equal impact and the researchers reasoned that volatility had been reduced because of fewer and smaller shocks to the economy.
In other words, luck was due to the credit, a finding that withstood their further econometric testing.
While saying luck is the most likely explanation, the Fed team held open the possibility that good monetary policy might have had an impact on expectations of future inflation in such a way the economy behaved differently than in the past - a complex interplay that could be muddying their findings.
And even if the absence of nasty shocks is mostly behind the smoother cycles, that does not mean the Fed has not done a good job. The researchers said Mr Greenspan and his colleagues have helped lessen big price swings, which coincided with the smoother pattern of growth.
"These results support the view that monetary policy has played a crucial role in stabilising inflation over the past two decades," they said.
REUTERS in Washington
Many have praised the brilliance of Alan Greenspan and his predecessor at the Federal Reserve helm for blunting the most savage swings of the United States business cycle. But there is a good chance most of what tamed the booms and tempered the busts was plain old dumb luck.
That is the finding of a paper by three researchers at the central bank's Washington-based Board of Governors who examined what might lie behind a marked decline in the volatility of US economic growth since the mid-1980s.
Many analysts credit the skilful economic steering of Mr Greenspan and inflation-slaying Paul Volcker, who preceded him as Fed chairman, for the improved performance.
Others have said the smoother pattern of growth in US gross domestic product reflected better business practices, particularly the "just in time" speedy inventory management new technologies made possible.
But researchers Shaghil Ahmed, Andrew Levin and Beth Anne Wilson say the apparent flattening of the peaks and valleys in the boom-bust cycle - and the little fits and starts in between - seems to be mostly chance.
"Although better practices and better monetary policies have played some role in explaining the decline of US output volatility in the past 10-15 years, good luck is probably the leading explanation," they said in a paper on the Fed's Web site.
"It might be premature to conclude that the reduction in volatility is a permanent feature of the US economy."
In the US boom years of the 1990s, some had ventured so far as to proclaim the business cycle dead. How alive it is has since become abundantly and painfully clear - just ask the 1.6 million in the US who lost their jobs last year.
Still, there is no dispute that volatility has been lower.
From 1960 through to 1983, annual rates of real gross domestic product growth gyrated wildly from quarter to quarter, with the annual rate dipping as low as minus 8 per cent and spiking as high as plus 15 per cent - a 23 percentage-point swing.
Since then, growth from one quarter to the next has followed a much more even path, with changes in GDP oscillating in a relatively contained 11-point range. What is more, there have been only two recessions, both brief and shallow by historical standards, with the most recent appearing to have ended early this year.
The Fed researchers determined that the volatility of growth had been cut in half. But why? If it had been mostly due to better monetary policy, the downward shift should be most evident in the tempering of business cycle peaks and troughs, while better inventory management would likely smooth growth within a cycle.
But the researchers found volatility reduced in equal proportion whether gauging it over the course of full cycles, or examining the shorter-run changes in GDP in between.
It seemed unlikely that better policy and business practices would have such an equal impact and the researchers reasoned that volatility had been reduced because of fewer and smaller shocks to the economy.
In other words, luck was due to the credit, a finding that withstood their further econometric testing.
While saying luck is the most likely explanation, the Fed team held open the possibility that good monetary policy might have had an impact on expectations of future inflation in such a way the economy behaved differently than in the past - a complex interplay that could be muddying their findings.
And even if the absence of nasty shocks is mostly behind the smoother cycles, that does not mean the Fed has not done a good job. The researchers said Mr Greenspan and his colleagues have helped lessen big price swings, which coincided with the smoother pattern of growth.
"These results support the view that monetary policy has played a crucial role in stabilising inflation over the past two decades," they said.