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Is the Great Moderation Ending? UK and US Evidence

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Author Info
Giorgio Canarella (California State University, Los Angeles, and University of Nevada, Las Vegas)
WenShwo Fang (Feng Chia University)
Stephen M. Miller (University of Connecticut and University of Nevada, las Vegas)
Stephen K. Pollard (California State University, Los Angeles)

Additional information is available for the following registered author(s):

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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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2008-24.

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Length: 52 pages
Date of creation: Aug 2008
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Handle: RePEc:uct:uconnp:2008-24

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Related research
Keywords: Great Moderation; Regime switching; SWARCH;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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