The decline in U.S. real GDP growth volatility after the mid 1980s
was an outcome of more risk efficient and more diversified sectoral
allocations. Using a portfolio approach, I distinguish between the
two determinants of GDP growth volatility: sectoral covariances and
sectoral allocations. I use the sectoral growth and covariances to
compute the growth-volatility frontier of the economy. I define the
efficiency of the actual sectoral allocation as the distance of the
economy from the frontier, measured in the (volatility, growth)
space. There are three main findings. 1) The frontier has shifted
due to a lower sectoral growth rate and a higher sectoral variance.
2) The distance of the economy from the frontier has decreased. The
efficiency over the period increased by 1.4 percentage points. This
increase occurred along the volatility dimension and it is
interpreted as the decline in the growth volatility in the economy,
if there were no changes in the sectoral covariances. This
efficiency improvement is comparable to the 1.5 percentage points
decline in GDP growth volatility in the data after the mid 1980s.
3) The U.S. economy became more diversified across sectors after
the early 1980s, shifting away from manufacturing and agriculture
towards services. The increase in the share of Finance and
Insurance coupled with the doubling of the growth volatility in
this sector, might have contributed to the recent increase in GDP
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