What Accounts for the Postwar Decline in Economic Volatility?

1. Define the following terms used in the reading:
   1. volatility
   2. risk-averse
   3. total factor productivity
   4. automatic stabilizer
   5. counter-cyclical fiscal policy
   6. potential output
   7. shocks

2. What evidence of declining economic volatility does the author present? How does he use the concepts of standard deviation and coefficient of variation to document the volatility decline? In what decade does volatility appear to have decreased most?

3. How have improved inventory management, the decline of manufacturing relative to services as a share of total employment, the behavior of oil prices, and productivity shocks contributed to reduced economic volatility? How important are these various nonpolicy factors judged to have been?

4. Why does fiscal policy receive little credit for the economy's reduced volatility?

5. In what specific ways did monetary policymakers become more aggressive at combating inflation after 1980? Why did this change in the conduct of monetary policy occur and why did it help to reduce economic volatility?

6. A significant part of the decline in volatility remains unaccounted for and is referred to as "unexplained good luck." What does this encompass and what are its implications for trends in economic volatility?

Source: "What Accounts for the Postwar Decline in Economic Volatility?" Keith Sill, Federal Reserve Bank of Philadelphia Business Review, First Quarter 2004, pp. 23-31.