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Is the Great Moderation over? an empirical analysis

Listed author(s):
  • Todd E. Clark

The economy of the United States was markedly less volatile in the past two to three decades than in prior periods. The nation enjoyed long economic expansions in each of the last three decades, interrupted by recessions in 1990-91 and 2001 that were mild by historical standards. While it has proven difficult to conclusively pinpoint the causes of the reduced volatility, candidates include structural changes in the economy, better monetary policy, and smaller shocks (good luck). Many economists and policymakers came to view lower volatility--the Great Moderation--as likely to be permanent. ; More recently, the severity of the recession that started in late 2007 has led some observers to conclude the Great Moderation is over. The recession produced declines in economic activity steeper than in the sharp recessions of the 1950s, 1970s, and early 1980s. ; However, the occurrence of a sharp recession does not necessarily mean variability has returned to pre-Great Moderation levels or that the Great Moderation is over. For example, the recession may have produced a more modest rise in volatility that could be temporary. Whether any rise in volatility is more likely temporary than permanent will depend on the cause of the rise in volatility. An increase in volatility due to structural changes in the economy or monetary policy might be permanent. But an increase in volatility driven by larger shocks might prove temporary. ; Clark conducts a detailed statistical analysis of the putative rise in volatility and its sources to assess whether the Great Moderation is over. He concludes that, over time, macroeconomic volatility will likely undergo occasional shifts between high and low levels, with low volatility the norm.

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File URL: http://www.kansascityfed.org/PUBLICAT/ECONREV/pdf/09q4Clark.pdf
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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2009)
Issue (Month): Q IV ()
Pages: 5-42

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Handle: RePEc:fip:fedker:y:2009:i:qiv:p:5-42:n:v.94no.4
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  1. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Explaining The Great Moderation: It Is Not The Shocks," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 621-633, 04-05.
  2. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  3. James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 215-283.
  4. Stephen G Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2005. "Assessing the Sources of Changes in the Volatility of Real Growth," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
  5. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January.
  6. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  7. Fabio Canova, 2009. "What Explains The Great Moderation in the U.S.? A Structural Analysis," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 697-721, 06.
  8. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
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  13. repec:fip:fedgsq:y:2008:x:72 is not listed on IDEAS
  14. Giorgio Canarella & WenShwo Fang & Stephen M. Miller & Stephen K. Pollard, 2008. "Is the Great Moderation Ending? UK and US Evidence," Working Papers 0801, University of Nevada, Las Vegas , Department of Economics.
  15. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  16. Ben S. Bernanke, 2008. "Current economic and financial conditions: a speech at the National Association for Business Economics 50th Annual Meeting, Washington, D.C., October 7, 2008," Speech 424, Board of Governors of the Federal Reserve System (U.S.).
  17. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
  18. Mattias Villani, 2009. "Steady-state priors for vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(4), pages 630-650.
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