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Great Moderation(s) and U.S. Interest Rates: Unconditional Evidence

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  • James M. Nason

    ()
    (Federal Reserve Bank of Atlanta)

  • Gregor W. Smith

    ()
    (Queen's University)

Abstract

The US economy experienced a Great Moderation sometime in the mid-1980s -- a fall in the volatility of output growth -- at the same time as a fall in both the volatility of inflation and the average rate of inflation. We put this moderation in historical perspective by comparing it to the post-WWII moderation. According to theory, the statistical moments -- both real and nominal -- that shift during these moderations in turn influence interest rates. We examine the predictions for shifts in the unconditional average of US interest rates. A central finding is that such shifts probably were due to changes in average inflation rather than to those in the variances of inflation and consumption growth.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1140.pdf
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1140.

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Length: 34 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:qed:wpaper:1140

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Keywords: great moderation; asset pricing;

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Cited by:
  1. Alexopoulos, Michelle & Tombe, Trevor, 2012. "Management matters," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 269-285.
  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. 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.
  4. 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.
  5. 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.

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