A central concept in this book is the simultaneous decline in inflation and output volatility – inflation-output costabilization (IOCS). Many researchers have documented the decline in economic volatility in the United States and elsewhere (Kim and Nelson 1999; McConnell and Perez-Quiros 2000; Blanchard and Simon 2001; Kahn, McConnell, and Perez-Quiros 2001, 2002; Labhard 2003; Martin and Rowthorn 2004). Much of this work focuses on output stability. One consistent finding is that this work dates the decline in volatility to the 1980s.

In this chapter we extend this research in several ways. Our purpose is to illustrate the economic stability in the United States since the 1980s and lay the groundwork for the relation between IOCS and policy. We explore this linkage in the following manner. First, we investigate the behavior of economic data. In particular, we examine together (and then separately) the volatility of inflation and output. Our particular concern, of course, is IOCS – the simultaneous and sustained reduction of both inflation and output volatility. In addition, to see if periods of inflation and output stability occur prior to the 1980s, our analysis covers the period 1960–2000.