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Great Moderation(s) and US Interest Rates: Unconditional Evidence

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  • Nason James M.

    ()
    (Federal Reserve Bank of Atlanta)

  • Smith Gregor W

    ()
    (Queen’s University)

Abstract

The Great Moderation refers to the fall in US output growth volatility in the mid-1980s. At the same time, the US experienced a moderation in inflation and lower average inflation. Asset pricing theory predicts that moderations -- real or nominal -- influence interest rates. Using annual data since 1890, we find that an earlier 1946 moderation in output and consumption growth was comparable to that of 1984. To assess the impact of these moderations, we also isolate the 1969-1983 Great Inflation using quarterly data since 1947. We examine the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of US interest rates across these time periods. A central finding is that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 8 (2008)
Issue (Month): 1 (November)
Pages: 1-33

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Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:30

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Cited by:
  1. John W. Keating & Victor J. Valcarcel, 2012. "What's so Great about the Great Moderation? A Multi-Country Investigation of Time-Varying Volatilities of Output Growth and Inflation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201204, University of Kansas, Department of Economics.
  2. James M Nason & Ellis Tallman, 2012. "Business cycles and financial crises: the roles of credit supply and demand shocks," Working Paper 1221, Federal Reserve Bank of Cleveland.
  3. Michelle Alexopoulos & Trevor Tombe, 2010. "Management Matters," Working Papers tecipa-406, University of Toronto, Department of Economics.
  4. Thorsten V. Koeppl, 2009. "How Flexible Can Inflation Targeting Be? Suggestions for the Future of Canada's Targeting Regime," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 293, August.
  5. John W. Keating & Victor J. Valcarcel, 2012. "The Time Varying Effects of Permanent and Transitory Shocks to Real Output," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201203, University of Kansas, Department of Economics.

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