Economic Review
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Over the last 20 years or so, the volatility of aggregate economic activity has fallen dramatically in most of the industrialized world. The timing and nature of the decline vary across countries, but the phenomenon has been so widespread and persistent that it has earned the label: “the Great Moderation.” A growing body of research has focused on the Great Moderation and its possible explanations, especially as it applies to the U.S. experience. The literature documents the international dimension of this volatility reduction, but so far little is known about the possible causes from a cross-country perspective. Summers shows why the Great Moderation has indeed been a common feature of much of the industrialized world. Specifically, he focuses on the reduction in the volatility of GDP growth that occurred in the G-7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) and Australia. He uses international evidence to evaluate the merits of three likely explanations. He concludes that, from an international perspective, good luck in the form of smaller energy price shocks is not a compelling explanation for widespread moderation of GDP growth volatility. Rather, the Great Moderation is more likely due to better monetary policy outcomes and improved inventory management techniques. For more than 50 years, suburbs throughout the United States have prospered, while many of the large cities they surround have stagnated. Hence, many people perceive that cities and suburbs tend to grow at each other’s expense—and thus compete for residents and jobs. While there is some truth in this perception, it misses the fact that a metro area’s cities and suburbs also depend on each other for economic growth. Cities and their suburbs share a multitude of resources, such as airports, highways, mass transit, cultural amenities, entertainment venues, air quality, potential employers, and many more. These shared resources may be even more important than the differences between cities and suburbs in determining where people live and jobs locate. Rappaport examines the main forces that have influenced the growth of cities and suburbs over the past century. He finds that, while cities and suburbs do sometimes grow at each other’s expense, more often they grow or decline together. Thus, while it may make sense for cities and their suburbs to compete along some dimensions, there are also strong incentives for the two to cooperate to make their metro areas attractive and productive places to live and work. Regions are facing rapidly evolving pressures from today’s global economy. The old rules of the game, where traditional assets such as cheap land and labor determined a region’s success or failure, no longer apply. Instead, new categories of assets are shaping economic prospects—assets like workforce skills, lifestyle amenities, access to capital and information, and innovative activity. Finding new pathways to tap these assets makes economic success much easier. The first step along each new pathway is to measure a region’s assets. The Center for the Study of Rural America is working to quantify today’s critical regional assets by developing a series of asset indicators. These measures should help regions gauge their own competitive capacities, as well as provide a better understanding of the new drivers of regional economic growth. Entrepreneurship is emerging as a particularly promising new engine for regional growth. The relation between long-term regional employment growth and entrepreneurship is strong. Not only do entrepreneurs create new local jobs, but they also generate new wealth and new growth. Back to top Economic Review home
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