econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 10 October 2016

Was The Great Moderation Simply On Vacation?

from the St Louis Fed

-- this post authored by Christopher J. Waller

From around 1984 to the mid-2000s, U.S. macroeconomic volatility dropped to unusually low levels. Economists dubbed the period the "Great Moderation." With the arrival of the Great Recession, many declared the Great Moderation over. However, data indicate that the increased volatility in 2007-09 may have been a temporary blip instead of a reversion back to the days of high volatility.

To understand whether the Great Moderation has ended, we need to look at what may have caused it. There are three main explanations:

  • Good luck: The shocks that derailed growth and price stability in the 1970s and early 1980s failed to rear their ugly heads over the subsequent 20 years.

  • Structural change: Improved information technology, especially related to inventory management, and financial deregulation resulted in much smoother economic progress.

  • Better monetary policy: Former Federal Reserve Chairman Paul Volcker set a precedent of aggressively reining in inflation.

The extent to which we believe each explanation played a role in the volatility reduction influences our opinion of whether the Great Moderation is likely to have returned.

  • If we believe that good luck played the largest role, then we may think we have lost those golden years forever.

  • If we believe that structural changes and/or monetary policy played a relatively larger role, then we should view the increased volatility during the Great Recession as the product of temporary factors that should have died out by now.

Fortunately, we don't have to rely on theories to answer this question. We have seven years of GDP and inflation data. The figure below shows the volatilities of real GDP growth and inflation over the past several years.

We can very clearly see the Great Moderation. We can also see the effects of the Great Recession. Note that the value at each date is the standard deviation in each variable using data from that quarter and the 19 quarters preceding it. Hence, it is not very surprising that the effects of the recession didn't diminish until late 2013. Once they did, however, volatility dropped back down to levels consistent with the Great Moderation.

Because we can think of periods of high volatility and low volatility as different states of the world (like cloudy and sunny), we can estimate the probability of being in each state at a given point in time.1 The figure below plots this probability for real GDP growth.

The results agree with those of the first figure: The Great Recession resulted in only a temporary increase in volatility. So the data say that the Great Moderation never really left. It just took those twenty years of steady earnings growth and treated itself to a two-year vacation.

Therefore, while good luck likely played a role, a lot of credit should probably be given to a more structurally stable economy and better monetary policy. The U.S. economy experienced one of its largest shocks ever and has continued to face shocks from oil prices and international economic instability, yet it has gone back to its old low-volatility ways.

Notes and References

1 In this case, we used a Markov regime-switching model. Think of "regime" as being synonymous with "state." The model basically looks for the presence of different states in the data. The results can then be used to estimate the probability of being in each state at a given point in the data.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2016/september/great-moderation-vacation

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 1
The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 2
News Blog
To Where The Maple Syrup Flows
The U.S. Has The Most Expensive Healthcare System In The World
Five Maps That Will Change How You See The World
What We Read Today 16 March 2017 - Special Public Edition
Hate Groups In The U.S. Are Flourishing
What We Read Today 23 March 2017
March 2017 Kansas City Fed Manufacturing At Highest Level Since March 2011
February 2017 Headline New Home Sales Improve and Above Expectations
18 March 2017 Initial Unemployment Claims Rolling Average Again Worsens
Get Around Baggage Check Fees With This Luggage Jacket
What Prompted The Electronic Devices Ban
Infographic Of The Day: The History Of Money Explained In One Infographic
Early Headlines: Asia Stocks Mixed, Oil, Dollar Up, Gold Down, Health Care Bill Fighting For Life, UK Car Mfg Hits 17-Yr High, UBS Charges 0.6% Int. On Deposits, China Debt Risks And More
Investing Blog
Tesla Is Playing The Long Game
Investing.com Technical Summary 23 March 2017
Opinion Blog
Time To Stop Rewarding Economists For Bad Behaviour
The American Dream: An Endangered Ethos
Precious Metals Blog
These Gold Stocks Will Produce Much Bigger Gains Than Gold Itself
Live Markets
23Mar2017 Market Close: Stocks Reversed Lower After GOP Health Worsened, Gold And Oil Followed Stocks But Dollar Rallied
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved