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The great moderation in historical perspective. Is it that great?

Author

Listed:
  • María Dolores Gadea

    (University of Zaragoza)

  • Ana Gómez-Loscos

    (Banco de España)

  • Gabriel Perez-Quiros

    (Banco de España)

Abstract

The Great Moderation (GM) is widely documented in the literature as one of the most important changes in the US business cycle. All the papers that analyze it use post-WWII data. In this paper, we set the GM for the first time against a long-dated historical backdrop, stretching back a century and a half, which includes secular changes in the economic structure and a substantial reduction of output volatility. We find two robust structural breaks in volatility at the end of WWII and in the mid-eighties, showing that the GM still holds in the longer perspective. Furthermore, we show that GM volatility reduction is only linked to expansion features. We also date the US business cycle in the long run, finding that volatility plays a primary role in the definition of the business cycle, which has important consequences for econometricians and forecasters.

Suggested Citation

  • María Dolores Gadea & Ana Gómez-Loscos & Gabriel Perez-Quiros, 2015. "The great moderation in historical perspective. Is it that great?," Working Papers 1527, Banco de España.
    • Handle: RePEc:bde:wpaper:1527
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    References listed on IDEAS

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    Cited by:

    1. Eduardo Bandrés & María Dolores Gadea-Rivas & Ana Gómez-Loscos, 2017. "Regional business cycles across europe," Occasional Papers 1702, Banco de España.
    2. Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2016. "Deepening Contractions and Collateral Constraints," CEPR Discussion Papers 11166, C.E.P.R. Discussion Papers.
    3. Bekaert, Geert & Engstrom, Eric & Ermolov, Andrey, 2021. "Macro risks and the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 141(2), pages 479-504.

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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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