One of the key macroeconomic events of the last 20 years has been the great moderation in volatility of output in the US. Changes in output volatility have trended down for years and the business cycle has been dampened. This moderation will be tested in 2008 if we move into recession territory, so understanding the reasons for the great moderation are critical. Most researchers have suggested that a combination of good monetary policy choices with luck have been the key reasons. The US economy also has not had the supply shocks of previous decades.
An interesting piece of research suggest that the reason is also tied to globalization. The increase in foreign direction investment by US multinational firms have helped to dampen the fluctuations. Albeit explaining about 20% of the dampening, it provides an interesting perspective. See http://www.bepress.com/gej/vol7/iss4/3/?sending=9972, "Aggregate Gains of International Diversification through Foreign Direct Investment: An Inquiry into the Moderation of U.S. Business Cycles" by Luis San Vicente Portes. Multinational corporations have diversified funding costs, investments and production as well as sales. The diversification has reduced the investment fluctuations in the US.
Not an easy argument for some to accept during the current times, but an interesting twist on globalization.
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