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Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area

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Author Info
M.S.Rafiq () (Dept of Economics, Loughborough University, United Kingdom)

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Abstract

Economic fluctuations in most of the industrialised world have for over the past 30 years been characterised by declining volatility. This decline has also been a trait witnessed for output fluctuations in the Euro Area. This paper has two objectives. The first is to provide a comprehensive characterisation of the decline in volatility using a large number of Euro area economic time series and a variety of methods designed to describe the time-varying time series processes. The second objective is to provide new evidence on the quantitative importance of various explanations for this ‘great moderation’. This paper focuses on the central elements in the literature contending why real output growth has stabilised. Such factors include shifts in the structure of the economy, improved policies, and a ‘good luck’ factor. Further, this paper goes on to investigate whether cross-country linkages in growth have shifted, perhaps in a way that can help rationalise the stabilisation in output. Taken together, the moderation in volatility is attributable to a combination of improved policy (around 5 - 30 percent) and identifiable forms of good luck that manifest themselves as smaller reduced-form forecast errors (40 percent).

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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2006_21.

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Date of creation: Nov 2006
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Handle: RePEc:lbo:lbowps:2006_21

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Related research
Keywords: Output Volatility; Monetary Policy; International shocks.;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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References listed on IDEAS
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