On the Sources of the Great Moderation Jordi Gal and Luca Gambetti - - PowerPoint PPT Presentation

▶
on the sources of the great moderation
SMART_READER_LITE
LIVE PREVIEW

On the Sources of the Great Moderation Jordi Gal and Luca Gambetti - - PowerPoint PPT Presentation

Dec 12, 2023 302 likes •710 views

On the Sources of the Great Moderation Jordi Gal and Luca Gambetti May 2008 Jordi Gal and Luca Gambetti () Great Moderation May 2008 1 / 11 The Great Moderation Basic Evidence (Table 1) Two Broad Hypotheses (i) good luck (ii)

slide-1
SLIDE 1

On the Sources of the Great Moderation

Jordi Galí and Luca Gambetti May 2008

Jordi Galí and Luca Gambetti () Great Moderation May 2008 1 / 11

slide-2
SLIDE 2

The Great Moderation

Basic Evidence (Table 1) Two Broad Hypotheses (i) good luck (ii) structural change (policy or non-policy related) ) di¤erent implications for second moments Our paper (i) evidence on changes in second moments of output, hours and labor productivity around the time of the volatility break (ii) identi…cation of the sources of those changes using time-varying SVAR ) time-varying conditional second moments and IRFs Such evidence may shed light on the merits of alternative explanations for the Great Moderation

Jordi Galí and Luca Gambetti () Great Moderation May 2008 2 / 11

slide-3
SLIDE 3

U.S. GDP Growth

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

  • 4
  • 3
  • 2
  • 1

1 2 3 4

Figure 1

slide-4
SLIDE 4
slide-5
SLIDE 5

The Great Moderation

Basic Evidence (Table 1) Two Broad Hypotheses (i) good luck (ii) structural change (policy or non-policy related) ) di¤erent implications for second moments Our paper (i) evidence on changes in second moments of output, hours and labor productivity around the time of the volatility break (ii) identi…cation of the sources of those changes using time-varying SVAR ) time-varying conditional second moments and IRFs Such evidence may shed light on the merits of alternative explanations for the Great Moderation

Jordi Galí and Luca Gambetti () Great Moderation May 2008 2 / 11

slide-6
SLIDE 6

Our Approach

Focus on output, hours and labor productivity Changes in unconditional second moments Identi…cation and estimation of conditional second moments and their changes over time Main tool: Time-varying VAR with stochastic volatility

  • Cogley-Sargent, Primiceri, Gambetti, Benati-Mumtaz
  • identi…cation based on Galí AER 99

technology and non-technology shocks technology shocks only source of unit root in labor productivity

  • extension to Fisher’s JPE 05 two technology shock model

Jordi Galí and Luca Gambetti () Great Moderation May 2008 3 / 11

slide-7
SLIDE 7

Main Findings

Increase in the volatility of hours and labor productivity relative to that of output. Decline in the cyclicality of labor productivity (relative to both hours and output) Main source of output volatility decline: fall in contribution of non-technology shocks Large decline in the correlation of labor productivity with both output and hours conditional on non-technology shocks, accelerating in the 1990s. Large negative correlation of hours with both output and labor productivity conditional on technology shocks. Exception: the second half of the 1970s (oil shocks) and 1990s (the dotcom boom period). ) Picture more complex picture than suggested by good luck hypothesis ) Structural changes in labor market, timing close to GM. Causality?

Jordi Galí and Luca Gambetti () Great Moderation May 2008 4 / 11

slide-8
SLIDE 8

The Labor Market and the Great Moderation

Focus on output, hours and labor productivity Quarterly U.S. data Nonfarm business sector Sample period: 1948:I-2005:IV Changes in Unconditional Volatilities (Table 2) Changes in Unconditional Comovements (Table 3)

Jordi Galí and Luca Gambetti () Great Moderation May 2008 5 / 11

slide-9
SLIDE 9
slide-10
SLIDE 10
slide-11
SLIDE 11

A Time-Varying Structural VAR

Let xt [∆(yt nt), nt] xt = A0,t + A1,t xt1 + A2,t xt2 + ... + Ap,t xtp + ut (1) where Etfutu0

tg = Σt.and Etfutx0 tkg = Etfutu0 tkg = 0 for

k = 1, 2, 3, ... Let At [A0,t, A1,t..., Ap,t] and θt vec(A0

t), we assume

θt = θt1 + ωt (2) where ωt N(0, Ω) is serially uncorrelated and independent of futg.

Jordi Galí and Luca Gambetti () Great Moderation May 2008 6 / 11

slide-12
SLIDE 12

Let Σt FtDtF 0

t

where Ft is lower triangular with ones on the diagonal and Dt is a diagonal matrix. De…ne γt = vec(F 1

t

) and σt = vec(Dt). We assume γt = γt1 + ζt log σt = log σt1 + ξt where ζt N(0, Ψ) and ξt N(0, Ξ) are serially and mutually uncorrelated.

Jordi Galí and Luca Gambetti () Great Moderation May 2008 7 / 11

slide-13
SLIDE 13

Identi…cation Structural shocks: εt [εa

t , εd t ]0, satisfying Efεtε0 tg = I

εa

t : technology shock

εd

t : non-technology shock

Assumption: ut = Kt εt for all t, for some non-singular matrix Kt satisfying KtK 0

t = Σt.

Identifying restriction: only technology shocks have a long-run e¤ect on labor productivity Resulting decomposition: xi,t = µi

t + ∞

∑

k=0

C ia

t,k εa tk + ∞

∑

k=0

C id

t,k εd tk

Jordi Galí and Luca Gambetti () Great Moderation May 2008 8 / 11

slide-14
SLIDE 14

Changing Labor Market Dynamics and the Great Moderation

Unconditional Second Moments (F2-3) Conditional Volatilities: What are the Forces behind the Great Moderation? (F4, T4) var(∆yt) = var(∆ya

t ) + var(∆yd t )

Conditional Correlations and Structural Change (F5, T5) corr(xt, zt) = λa corra(xt, zt) + λd corrd(xt, zt) where λi σi (xt)

σ(xt) σi (zt) σ(zt) .

Time-Varying Impulse Responses (F6-8) Extension: Fisher Three-Variable Model

Jordi Galí and Luca Gambetti () Great Moderation May 2008 9 / 11

slide-15
SLIDE 15

Figure 2a Time-Varying Standard Deviations

Output Hours Productivity

1965 1970 1975 1980 1985 1990 1995 2000 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5

slide-16
SLIDE 16

Figure 2b Time-Varying Relative Standard Deviations

Hours Productivity

1965 1970 1975 1980 1985 1990 1995 2000 0.6 0.65 0.7 0.75 0.8 0.85 0.9

slide-17
SLIDE 17

Figure 3 Time-Varying Unconditional Correlations

(n,y) (y-n,y) (y-n,n) s.d.(y)

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

  • 0.5

0.5 1 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0.5 1 1.5 2

slide-18
SLIDE 18

Changing Labor Market Dynamics and the Great Moderation

Unconditional Second Moments (F2-3) Conditional Volatilities: What are the Forces behind the Great Moderation? (F4, T4) var(∆yt) = var(∆ya

t ) + var(∆yd t )

Conditional Correlations and Structural Change (F5, T5) corr(xt, zt) = λa corra(xt, zt) + λd corrd(xt, zt) where λi σi (xt)

σ(xt) σi (zt) σ(zt) .

Time-Varying Impulse Responses (F6-8) Extension: Fisher Three-Variable Model

Jordi Galí and Luca Gambetti () Great Moderation May 2008 9 / 11

slide-19
SLIDE 19

Figure 4a Conditional Standard Deviations: Output

Technology Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5

slide-20
SLIDE 20

Figure 4b Conditional Standard Deviations: Hours

Technology Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1

slide-21
SLIDE 21

Figure 4c Conditional Standard Deviations: Labor Productivity

Technology Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000 0.3 0.4 0.5 0.6 0.7 0.8 0.9

slide-22
SLIDE 22
slide-23
SLIDE 23

Changing Labor Market Dynamics and the Great Moderation

Unconditional Second Moments (F2-3) Conditional Volatilities: What are the Forces behind the Great Moderation? (F4, T4) var(∆yt) = var(∆ya

t ) + var(∆yd t )

Conditional Correlations and Structural Change (F5, T5) corr(xt, zt) = λa corra(xt, zt) + λd corrd(xt, zt) where λi σi (xt)

σ(xt) σi (zt) σ(zt) .

Time-Varying Impulse Responses (F6-8) Extension: Fisher Three-Variable Model

Jordi Galí and Luca Gambetti () Great Moderation May 2008 9 / 11

slide-24
SLIDE 24

Figure 5a Conditional Correlations: Hours - Output

Technology Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000

  • 1
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1

slide-25
SLIDE 25

Figure 5b Conditional Correlations: Labor Productivity - Hours

Technology Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000

  • 1
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1

slide-26
SLIDE 26

Figure 5c Conditional Correlations: Labor Productivity - Output

Technology Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000

  • 1
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1

slide-27
SLIDE 27
slide-28
SLIDE 28

Changing Labor Market Dynamics and the Great Moderation

Unconditional Second Moments (F2-3) Conditional Volatilities: What are the Forces behind the Great Moderation? (F4, T4) var(∆yt) = var(∆ya

t ) + var(∆yd t )

Conditional Correlations and Structural Change (F5, T5) corr(xt, zt) = λa corra(xt, zt) + λd corrd(xt, zt) where λi σi (xt)

σ(xt) σi (zt) σ(zt) .

Time-Varying Impulse Responses (F6-8) Extension: Fisher Three-Variable Model

Jordi Galí and Luca Gambetti () Great Moderation May 2008 9 / 11

slide-29
SLIDE 29

Figure 6a Non-Technology Shocks: Output Response

slide-30
SLIDE 30

2 4 6 8 10 12 14 16 18 20 0.2 0.4 0.6 0.8 1 1.2

Figure 6b Pre-84 Post-84 Figure 6c

2 4 6 8 10 12 14 16 18 20

  • 1
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.2

Post-84 minus Pre-84

slide-31
SLIDE 31

Figure 7a Non-Technology Shocks: Labor Productivity Response

slide-32
SLIDE 32

Figure 7b Pre-84 Post-84

2 4 6 8 10 12 14 16 18 20

  • 0.2
  • 0.1

0.1 0.2 0.3

Figure 7c

2 4 6 8 10 12 14 16 18 20

  • 0.8
  • 0.7
  • 0.6
  • 0.5
  • 0.4
  • 0.3
  • 0.2
  • 0.1

0.1 0.2

Post-84 minus Pre-84

slide-33
SLIDE 33

Figure 8a Technology Shocks: Hours Response

slide-34
SLIDE 34

Figure 8b Figure 8c Pre-84 Post-84

2 4 6 8 10 12 14 16 18 20

  • 0.3
  • 0.25
  • 0.2
  • 0.15
  • 0.1
  • 0.05

Post-84 minus Pre-84

2 4 6 8 10 12 14 16 18 20

  • 0.6
  • 0.4
  • 0.2

0.2 0.4 0.6 0.8

slide-35
SLIDE 35

Changing Labor Market Dynamics and the Great Moderation

Unconditional Second Moments (F2-3) Conditional Volatilities: What are the Forces behind the Great Moderation? (F4, T4) var(∆yt) = var(∆ya

t ) + var(∆yd t )

Conditional Correlations and Structural Change (F5, T5) corr(xt, zt) = λa corra(xt, zt) + λd corrd(xt, zt) where λi σi (xt)

σ(xt) σi (zt) σ(zt) .

Time-Varying Impulse Responses (F6-8) Extension: Fisher Three-Variable Model

Jordi Galí and Luca Gambetti () Great Moderation May 2008 9 / 11

slide-36
SLIDE 36

Figure 9 Augmented Model: Conditional Output Volatilities

1965 1970 1975 1980 1985 1990 1995 2000 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

N-Shocks I-Shocks Non-Technology Unconditional

slide-37
SLIDE 37

Figure 10 Augmented Model: Conditional Hours-Labor Productivity Correlations

N-Shocks I-Shocks Non-Technology Unconditional

1965 1970 1975 1980 1985 1990 1995 2000

  • 1
  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1

slide-38
SLIDE 38

Main Findings and Some Implications

Main source of the Great Moderation: smaller contribution of non-technology shocks

  • no RBC explanation (contrary to Arias-Hansen-Ohanian hypothesis)
  • what role for good luck (smaller shocks)? what role for policy?

Change in the response of labor productivity to a demand shock

  • main source of change in labor productivity-hours correlations

Substantial evidence against "good luck" hypothesis Evidence consistent (but not a proof) of more stabilizing (less destabilizing) policies. Caveat: Imperfect accommodation of technology shocks? Structural change in the labor market? Causal role as a source of volatility decline?

Jordi Galí and Luca Gambetti () Great Moderation May 2008 10 / 11

slide-39
SLIDE 39

A Hypothesis: The End of SRIRL?

Technology yt = at + (1 α) n

t + ξt

where n

t = nt + et

nt : measured (log) labor input et : (log) e¤ort Assumption: et = γ n

t

γ : index of labor hoarding Measured Labor Productivity: yt nt = at + γ α 1 γ

  • nt + ξt

Greater labor market ‡exibility? Also consistent with changes in relative volatilities. Causal role? Mechanism? Further work needed...

Jordi Galí and Luca Gambetti () Great Moderation May 2008 11 / 11