Reduced variance of shocks leads to stable US business cycles.
The decline in US business cycle volatility since the mid-1980s was mainly due to a decrease in the variance of shocks. Supply shocks played a significant role in inflation volatility before 1984, while demand shocks were more prominent in output volatility. Changes in Fed monetary policy also influenced business cycle stability, shifting from inflation fighting to a mix of inflation control and countercyclical responses to economic conditions.