Tuesday , October 24 2017
Home / FRED / Moderately well understood : The Great Moderation is evident, but its causes are complex

Moderately well understood : The Great Moderation is evident, but its causes are complex

Summary:
[embedded content] For decades, economists have puzzled over the reduction in macroeconomic volatility in the U.S. and world economies after the mid-1980s: In the last 25 years or so of the 20th century (highlighted by the blue bar in the graph), domestic output, employment, and inflation all fluctuated far less than they had in prior years. The data make the stabilization of the economy clear, yet economists haven’t reached consensus over the causes or duration of the Great Moderation. The Federal Reserve points to monetary policy as a primary cause of the moderation, through orderly responses to inflation and GDP changes after the Great Inflation of the 1980s. Instead of waiting for the signs of economic recession or rising inflation to appear before acting, as was common in the

Topics:
FRED Blog considers the following as important: ,

This could be interesting, too:

FRED Blog writes Crowds in the air : Graphing airfares and passenger load factors

Tony Yates writes Stopping Brexit won’t take the economy back onto its pre-referendum path

FRED Blog writes Extra, extra, read all about it! : There’s more to the story than headline unemployment

FRED Blog writes Three views of the U.S. trade deficit : Minding units and considering services

For decades, economists have puzzled over the reduction in macroeconomic volatility in the U.S. and world economies after the mid-1980s: In the last 25 years or so of the 20th century (highlighted by the blue bar in the graph), domestic output, employment, and inflation all fluctuated far less than they had in prior years. The data make the stabilization of the economy clear, yet economists haven’t reached consensus over the causes or duration of the Great Moderation.

The Federal Reserve points to monetary policy as a primary cause of the moderation, through orderly responses to inflation and GDP changes after the Great Inflation of the 1980s. Instead of waiting for the signs of economic recession or rising inflation to appear before acting, as was common in the “go-stop” practices of the 1960s and 1970s, the Federal Reserve began following a more systematic, rules-based approach. Another proposed cause is the structural change of the economy and the labor market. In the 1980s, labor patterns shifted away from manufacturing and toward less-volatile sectors. Also, new technology sped up communication and allowed producers to track inventory and demand more easily, leading to more stable output over time.

It’s easy to look to clear economic and policy changes as contributors to the Great Moderation, but there may be another factor at play: luck. Statistical models such as those proposed by Stock and Watson or Galí and Gambetti assert that, although some economic shocks did occur during the early part of the Great Moderation, they were less severe and better handled than those of the 1970s. While others dispute this claim, it still brings to mind the question: If luck is responsible, how long will it last?

There’s no answer yet to the question of whether the Great Moderation ended with the recession of 2007-09 or was merely temporarily disrupted by it. If we assume that structural and policy changes brought about the reduction in volatility, then, as long as those are maintained, the moderation ought to continue. However, if good fortune is responsible, we may still be waiting for the next shock that will bring about another increase in instability.

How this graph was created: Search “Real GDP” and select the relevant series. From the “Edit Graph” tab, click “Add Line” and select “Create use-defined line.” Set the date range from 1983 to 2017 and set both the start and end points as zero.

Suggested by Maria Hyrc and Christian Zimmermann.

About FRED Blog
FRED Blog
The Federal Reserve Bank of St. Louis is the center of the Eighth District of the Federal Reserve System. This District includes Arkansas, eastern Missouri, southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi.

Leave a Reply

Your email address will not be published. Required fields are marked *