Précis
Structural changes in the 1990s
Regional dispersion of unemployment
Less economic volatility?
Structural changes in the 1990s
Ray C. Fair, writing in Business Economics, also examines the economy for signs of fundamental change. Fair, somewhat contrarily, finds that much of what is often hypothesized as structural change or a "new economy," may not stand up to econometric testing. Fair tested the 30 stochastic equations of his multicountry macroeconomic model for end-of-sample stability. He found that the null hypothesis (stability) was only rejected for three of the equations. Of these three, the equation for capital gains—the model’s manifestation of the stock market boom—was the most important. None of Fair’s aggregate demand, price, wage, or labor supply and demand equations had its stability hypothesis rejected.
Fair also analyzed the possible impact of the boom not having occurred. Again using his multicountry model, Fair hypothetically stripped out the effect of the stock market boom on such factors as the wealth effect on consumption and the cost of capital effect on investment. The results of the counterfactual analysis led Fair to conclude, "… according to the [multicountry] model the U.S. economic boom of the last half of the 1990s was fueled by the wealth effect and the cost of capital effect from the stock market boom. Had it not been for the stock market boom, the economy would have looked more or less normal."
Regional dispersion of unemployment
There are significant State-by-State differences in business cycle dynamics, according to a report by Howard J. Wall and Gylfi Zoega in the Federal Reserve Bank of St. Louis Review. Further, assert the authors, the fact such dispersion exists may have significant impacts on aggregate business cycle parameters.
In general, the cross-State coefficient of variation in unemployment rates has fluctuated in roughly the same pattern as the National unemployment rate. The most notable exception was in1986–87; a collapse in oil prices led to rising unemployment in a few States while the total rate fell. Certainly, the decline in overall unemployment in the 1990s was accompanied by a gradual convergence of State unemployment rates.
Such variations in the dispersion of unemployment rates may have an impact on estimated relationships between unemployment, wages, and inflation according to Wall and Zoega. Many studies have concluded that wage adjustments are asymmetric and especially likely to be skewed away from wage reductions in response to rising unemployment. In some models, such asymmetry implies that the greater the dispersion across States, for any given aggregate unemployment rate the associated pressure on wages will be lessened. This relationship, coupled with the lower dispersion of unemployment rates in the 1990s, may have contributed to the coexistence of relatively low unemployment and inflation rates in the 1990s.
The economy appears to be more stable today than it was 30 or 40 or 50 years ago, says Keith Sill in the Philadelphia Federal Reserve Bank’s Business Review. Recessions are less frequent and the swings in economic measures such as gross domestic product (GDP) and unemployment rate are less pronounced.
In his documentation of the decline in economic volatility, Sill shows that the standard deviation of the rate of growth in GDP has declined from just under 0.7 percentage points in the mid-1950s to about 0.3 percentage points in the early 1960s before climbing again in the turbulent 1970s and early-1980s. Since the second half of the 1980s, this measure has been below 0.3 percentage points and has often been below 0.2 percentage points.
Sill also cites research by James Stock and Mark Watson on changes in the volatility of 168 macroeconomic variables. Their findings, as reported by Still, were that the standard deviations of these series are now typically 30 or 40 percent lower than they were in the 1970s and early 1980s.
Sill finds that the reasons for these changes are not well understood. He believes that policies leading to a more stable price environment have helped, but says, "to the extent that a substantial fraction of the decline in volatility remains unaccounted for, it remains uncertain whether lower volatility is a permanent feature of the U.S. economy."
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