Bubbles & Volatility

In the comment section of this post by Scott Sumner, I came across an interesting exchange between TravisV and Scott:


Prof. Sumner,

At the AEI event with Avent and Pethokoukis, you suggested as an aside that there is an association between volatile NGDP and asset price bubbles. Could you please clarify that reasoning? I don’t see the connection, given that NGDP was very volatile during the 1970′s and there weren’t any major asset price bubbles.

TravisV. In both the early 1930s and late 2008 NGDP was very volatile, and asset prices were extremely volatile. A “bubble” is really nothing more than extremely volatile asset prices over a frequency of years.

TravisV replies:

Alright, I guess I need more help with Prof. Sumner’s “volatile NGDP encourages asset price bubbles” theory.

NGDP was volatile in the 1970′s but there were no major asset bubbles then. Seems like major contrary evidence to me.

Below I repeat my previous chart on NGDP volatility ‘through the ages’ and below I add the corresponding chart for the S&P 500 volatility.



There are two occasions where there are a few points significantly outside the volatility ‘boundary’ for the S&P. During 1979-86, on the ‘up direction’ and in the early stages of the “Great Recession” in the ‘down direction’.

The takeaway is that there seems to be no association between NGDP volatility and asset (stock) price volatility. And given that the volatility of the S&P was mostly within the ‘boundary’ over the whole period, either there was no stock price bubble or a bubble has no connection with volatility.

4 thoughts on “Bubbles & Volatility

  1. In his comments (ssumner 25. March 2013 at 06:46) Scott suggests that an answer lies in the proper definition of “volatility”.
    Fair enough. I suggest “volatility” is the opposite of “moderation”.

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