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Atlanta Fed Working Papers


Productivity, Energy Prices, and the Great Moderation: A New Link

Rajeev Dhawan, Karsten Jeske, and Pedro Silos
Working Paper 2008-11
March 2008

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We study how total factor productivity (TFP), energy prices, and the Great Moderation are linked. First we estimate a joint stochastic process for the energy price and TFP and establish that until the second quarter of 1982, energy prices negatively affected productivity. This spillover has since disappeared. Second, we show that within the framework of a dynamic stochastic general equilibrium model, the disappearance of this energy-productivity spillover generates the significantly lower volatility of output and its components. Specifically, the change in the joint stochastic process accounts for close to 70 percent of the moderation in output volatility.

JEL classification: C22, E32, Q43

Key words: Bayesian estimation, productivity, energy price, Great Moderation, business cycles


The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Pedro Silos (contact author), Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8630, pedro.silos@atl.frb.org; Karsten Jeske, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8825, 404-498-8956 (fax), jeske100@gmail.com; or Rajeev Dhawan, Robinson College of Business, Georgia State University.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.