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Great Moderation and Great Recession. From plain sailing to stormy seas?

Author

Listed:
  • Ana gomez-Loscos
  • M. Dolores Gadea (Universidad de Zaragoza)
  • Gabriel Perez-Quiros (Bank of Spain)

Abstract

Many have argued that the Great Recession of 2008 marks the end of the Great Moderation of the eighties and nineties. This paper shows this is not the case through painstaking empirical analysis of the data. Output volatility remains subdued despite the tumult created by the Great Recession. This finding has important implications for policymaking since a lower volatility of output (the hallmark of the Great Moderation) is associated with lower recoveries. We revisit the results obtained in the seminal paper of McConnell and Perez-Quiros (2000) with the updated sample so as to include the most recent developments associated with the GR. We find that the GM, as it was originally formulated, still holds. However, we want to test the robustness of this result. Firstly, we apply additional econometric techniques that allow the possibility of multiple structural breaks in the volatility of the series. Secondly, to test the validity of the results, we perform different experiments considering alternative economic scenarios for the future, extending the business cycle features of the GR several periods ahead, concocting the observations of the GR with those of the GM and even simulating processes of higher volatility. The global financial crisis of 2007 and the ensuing economic recession has prompted a debate on the possible end of the tranquil times of the GM. However, this paper presents evidence that the decrease in volatility associated with the GM seems to be quite a permanent phenomenon that holds in spite of the occurrence of further downturns in the characteristics of the GR or even of the fact that this may continue to extended horizons. The fact that the GR holds even though we have su ered a strong recession, and the fact that it would hold even if we have this pattern of recession-recovery for a long time, should make us reconsider the explanations roposed in the literature about the causes of the GM, especially those related to good policy or good luck.

Suggested Citation

  • Ana gomez-Loscos & M. Dolores Gadea (Universidad de Zaragoza) & Gabriel Perez-Quiros (Bank of Spain), 2015. "Great Moderation and Great Recession. From plain sailing to stormy seas?," EcoMod2015 8267, EcoMod.
    • Handle: RePEc:ekd:008007:8267
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    Cited by:

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    2. Demetrescu, Matei & Kruse-Becher, Robinson, 2025. "Is U.S. real output growth non-normal? A tale of time-varying location and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 171(C).
    3. Pierre Perron & Yohei Yamamoto & Jing Zhou, 2020. "Testing jointly for structural changes in the error variance and coefficients of a linear regression model," Quantitative Economics, Econometric Society, vol. 11(3), pages 1019-1057, July.
    4. Esteve Vicente & Prats Maria A., 2021. "Structural Breaks and Explosive Behavior in the Long-Run: The Case of Australian Real House Prices, 1870–2020," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 15(1), pages 72-84, January.
    5. Emilio Congregado & Carmen Díaz-Roldán & Vicente Esteve, 2023. "Deficit sustainability and fiscal theory of price level: the case of Italy, 1861–2020," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 50(3), pages 755-782, August.
    6. Catherine Doz & Laurent Ferrara & Pierre-Alain Pionnier, 2020. "Business cycle dynamics after the Great Recession: An extended Markov-Switching Dynamic Factor Model," OECD Statistics Working Papers 2020/01, OECD Publishing.
    7. Florian Misch & Martin Rey, 2022. "The case for a loan-based euro area stability fund," Discussion Papers 20, European Stability Mechanism, revised 05 May 2022.
    8. Erdenebat Bataa, 2019. "Growth and Inflation Regimes in Greater Tumen Initiative Area," The Northeast Asian Economic Review, ERINA - Economic Research Institute for Northeast Asia, vol. 7(1), pages 15-29, November.
    9. Sun, Weihong & Liu, Ding, 2023. "Great moderation with Chinese characteristics: Uncovering the role of monetary policy," Economic Modelling, Elsevier, vol. 121(C).
    10. Pierre Perron & Yohei Yamamoto, 2022. "The great moderation: updated evidence with joint tests for multiple structural changes in variance and persistence," Empirical Economics, Springer, vol. 62(3), pages 1193-1218, March.
    11. Vicente Esteve & María A. Prats, 2021. "Testing for rational bubbles in Australian housing market from a long-term perspective," Working Papers 2113, Department of Applied Economics II, Universidad de Valencia.
    12. Shah, Adil Ahmad & Paul, Manas & Bhanja, Niyati & Dar, Arif Billah, 2021. "Dynamics of connectedness across crude oil, precious metals and exchange rate: Evidence from time and frequency domains," Resources Policy, Elsevier, vol. 73(C).
    13. Matei Demetrescu & Robinson Kruse-Becher, 2021. "Is U.S. real output growth really non-normal? Testing distributional assumptions in time-varying location-scale models," CREATES Research Papers 2021-07, Department of Economics and Business Economics, Aarhus University.
    14. Congregado, Emilio & Esteve, Vicente, 2022. "Cointegration with structural changes and classical model of inflation in Spain, 1830–1998," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 376-388.

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