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Explaining The Great Moderation: It Is Not The Shocks

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Listed:
  • Domenico Giannone
  • Michele Lenza
  • Lucrezia Reichlin

Abstract

This paper shows that the explanation of the decline in the volatility of GDP growth since the mid 1980s is not the decline in the volatility of exogenous shocks but rather a change in their propagation mechanism. (JEL: E32, E37, C32, C53) (c) 2008 by the European Economic Association.

Suggested Citation

  • 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.
  • Handle: RePEc:tpr:jeurec:v:6:y:2008:i:2-3:p:621-633
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    References listed on IDEAS

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    1. Fabio Canova & Luca Gambetti & Evi Pappa, 2007. "The Structural Dynamics of Output Growth and Inflation: Some International Evidence," Economic Journal, Royal Economic Society, vol. 117(519), pages 167-191, March.
    2. Domenico Giannone & Lucrezia Reichlin, 2006. "Does information help recovering structural shocks from past observations?," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 455-465, 04-05.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    4. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
    5. 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.
    6. Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
    7. 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.
    8. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, May.
    9. De Mol, Christine & Giannone, Domenico & Reichlin, Lucrezia, 2006. "Forecasting Using a Large Number of Predictors: Is Bayesian Regression a Valid Alternative to Principal Components?," CEPR Discussion Papers 5829, C.E.P.R. Discussion Papers.
    10. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    11. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
    12. Timothy Cogley & Thomas J. Sargent, 2005. "Drift and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 262-302, April.
    13. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2009. "Opening The Black Box: Structural Factor Models With Large Cross Sections," Econometric Theory, Cambridge University Press, vol. 25(05), pages 1319-1347, October.
    14. Efrem Castelnuovo & Paolo Surico, 2005. "The Price Puzzle: Fact or Artefact?," Macroeconomics 0505015, EconWPA, revised 19 Jul 2005.
    15. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    16. Benoît Mojon, 2007. "Monetary policy, output composition and the Great Moderation," Working Paper Series WP-07-07, Federal Reserve Bank of Chicago.
    17. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    18. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    19. Shaghil Ahmed & Andrew Levin & Beth Anne Wilson, 2004. "Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 824-832, August.
    20. De Mol, Christine & Giannone, Domenico & Reichlin, Lucrezia, 2008. "Forecasting using a large number of predictors: Is Bayesian shrinkage a valid alternative to principal components?," Journal of Econometrics, Elsevier, vol. 146(2), pages 318-328, October.
    21. Efrem Castelnuovo, 2006. "Assessing Different Drivers of the GreatModeration in the U.S," "Marco Fanno" Working Papers 0025, Dipartimento di Scienze Economiche "Marco Fanno".
    22. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
    23. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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