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US Postwar Macroeconomic Fluctuations Without Indeterminacy

Author

Abstract
We estimate a multi-shock DSGE model with a Bayesian method that differentiates between states of determinacy and indeterminacy. Determinacy is statistically preferred to indeterminacy before and after 1980. Key to this finding is a Taylor rule wherein the Fed targets output growth relative to trend instead of the level of the output gap or a mix of output gap and output growth. This allows us to revisit postwar macroeconomic fluctuations without indeterminacy. Relative to the pre-1980s, we find that the post-1983 contribution of shocks to the marginal efficiency of investment to the cyclical variance of output growth fell from 50% in the pre-1980s to 20% during the Great Moderation. Greater nominal wage flexibility was a main source of decline in the volatility of output and working hours during the Great Moderation, a finding which appears consistent with the post-1980 large deunionization in the private sector. Lower inflation variability resulted mostly from the Fed’s hawkish stance against inflation and changes in preference parameters. Lower trend inflation and smaller shocks were not major factors driving the Great Moderation.

Suggested Citation

  • Joshua Brault & Hashmat Khan & Louis Phaneuf & Jean Gardy Victor, 2021. "US Postwar Macroeconomic Fluctuations Without Indeterminacy," Carleton Economic Papers 21-01, Carleton University, Department of Economics, revised 25 May 2021.
    • Handle: RePEc:car:carecp:21-01
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    References listed on IDEAS

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    Cited by:

    1. Joshua Brault & Hashmat Khan & Louis Phaneuf & Jean Gardy Victor, 2021. "Did the Fed Remain at the ZLB Long Enough? Lessons from the 2008-2019 Period," Working Papers 21-09, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.

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    More about this item

    Keywords

    Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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