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Great moderations and U.S. interest rates: unconditional evidence

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  • James M. Nason
  • Gregor W. Smith

Abstract

The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier, 1946 moderation in output and consumption growth was comparable to that of 1984. Using quarterly data since 1947, we also isolate the 1969–83 Great Inflation to refine the asset pricing implications of the moderations. Asset pricing theory predicts that moderations—real or nominal—influence interest rates. We examine the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of U.S. interest rates. 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

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2008-01.

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Date of creation: 2008
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Handle: RePEc:fip:fedawp:2008-01

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Keywords: Interest rates ; Inflation (Finance);

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Cited by:
  1. 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.
  2. 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.
  3. James M. Nason & Ellis W. Tallman, 2012. "Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks," CAMA Working Papers 2012-44, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Michelle Alexopoulos, 2010. "Management Matters," 2010 Meeting Papers 332, Society for Economic Dynamics.
  5. 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.

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