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Is the Great Moderation over? an empirical analysis

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  • Todd E. Clark

Abstract

The economy of the United States was markedly less volatile in the past two to three decades than in prior periods. The nation enjoyed long economic expansions in each of the last three decades, interrupted by recessions in 1990-91 and 2001 that were mild by historical standards. While it has proven difficult to conclusively pinpoint the causes of the reduced volatility, candidates include structural changes in the economy, better monetary policy, and smaller shocks (good luck). Many economists and policymakers came to view lower volatility--the Great Moderation--as likely to be permanent. ; More recently, the severity of the recession that started in late 2007 has led some observers to conclude the Great Moderation is over. The recession produced declines in economic activity steeper than in the sharp recessions of the 1950s, 1970s, and early 1980s. ; However, the occurrence of a sharp recession does not necessarily mean variability has returned to pre-Great Moderation levels or that the Great Moderation is over. For example, the recession may have produced a more modest rise in volatility that could be temporary. Whether any rise in volatility is more likely temporary than permanent will depend on the cause of the rise in volatility. An increase in volatility due to structural changes in the economy or monetary policy might be permanent. But an increase in volatility driven by larger shocks might prove temporary. ; Clark conducts a detailed statistical analysis of the putative rise in volatility and its sources to assess whether the Great Moderation is over. He concludes that, over time, macroeconomic volatility will likely undergo occasional shifts between high and low levels, with low volatility the norm.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2009)
Issue (Month): Q IV ()
Pages: 5-42

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Handle: RePEc:fip:fedker:y:2009:i:qiv:p:5-42:n:v.94no.4

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Cited by:
  1. Camacho, Maximo & Perez Quiros, Gabriel & Rodriguez Mendizabal, Hugo, 2011. "High-growth recoveries, inventories and the Great Moderation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1322-1339, August.
  2. Matei Demetrescu & Christoph Hanck, 2013. "Nonlinear IV panel unit root testing under structural breaks in the error variance," Statistical Papers, Springer, vol. 54(4), pages 1043-1066, November.
  3. Gamber, Edward N. & Smith, Julie K. & Weiss, Matthew A., 2011. "Forecast errors before and during the Great Moderation," Journal of Economics and Business, Elsevier, vol. 63(4), pages 278-289, July.
  4. Valcarcel, Victor J., 2012. "The dynamic adjustments of stock prices to inflation disturbances," Journal of Economics and Business, Elsevier, vol. 64(2), pages 117-144.
  5. Valcarcel, Victor J. & Wohar, Mark E., 2013. "Changes in the oil price-inflation pass-through," Journal of Economics and Business, Elsevier, vol. 68(C), pages 24-42.
  6. James Morley & Aarti Singh, 2012. "Inventory Mistakes and the Great Moderation," Discussion Papers 2012-42, School of Economics, The University of New South Wales.
  7. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.

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