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Is the Great Moderation Ending? UK and US Evidence

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Author Info

  • Giorgio Canarella

    (Department of Economics, University of Nevada, Las Vegas)

  • WenShwo Fang

    (Feng Chia University)

  • Stephen M. Miller

    ()
    (Department of Economics, University of Nevada, Las Vegas)

  • Stephen K. Pollard

    (Department of Economics, California State University, Los Angeles)

Abstract

The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories: good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist: energy-price and housing-price shocks.

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Bibliographic Info

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 0801.

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Length: 51 pages
Date of creation: Nov 2008
Date of revision:
Publication status: Published in Modern Economy, May 2010
Handle: RePEc:nlv:wpaper:0801

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Keywords: Great Moderation; Regime switching; SWARCH;

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Blog mentions

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  1. Recession: no big deal
    by chris dillow in Stumbling and Mumbling on 2008-10-24 09:00:36
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Cited by:
  1. Amélie Charles & Olivier Darné & Laurent Ferrara, 2014. "Does the Great Recession imply the end of the Great Moderation? International evidence," Working Papers hal-00952951, HAL.
  2. Eduard Baumöhl & Štefan Lyócsa & Tomáš Výrost, 2011. "Volatility Regimes in Macroeconomic Time Series: The Case of the Visegrad Group," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(6), pages 530-544, December.
  3. Todd E. Clark & Francesco Ravazzolo, 2012. "The macroeconomic forecasting performance of autoregressive models with alternative specifications of time-varying volatility," Working Paper 1218, Federal Reserve Bank of Cleveland.
  4. Paul Blackley, 2011. "Production Adjustments for Consumer Durables and the Great Moderation," Atlantic Economic Journal, International Atlantic Economic Society, vol. 39(3), pages 291-302, September.

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