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What's so great about the Great Moderation?

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  • Keating, John W.
  • Valcarcel, Victor J.
Abstract
This paper examines how volatilities of output growth and inflation have changed over a long period for eight countries. We obtain a number of robust empirical results based on a variety of different econometric methods. The lowest volatility occurs during or shortly after the Great Moderation period. Volatility is reduced during that time for most of the countries; however, these reductions in volatility pale in comparison with stability gains achieved during two other periods. One of those periods is the Postwar Moderation, which began near the end of World War II for each country. Not only is the decline in volatility impressive, but also the volatility is typically at the lowest level up to that point in a sample or at least has fallen to a low not seen for decades. And those reductions in volatility are statistically significant, in contrast to the Great Moderation. A second fall in volatility that in nearly all cases exceeds that of the Great Moderation is for inflation during the 1920s. And this moderation in inflation during the 1920s is statistically significant in almost every case. Overall, these and a number of other notable changes in volatility are remarkably robust across countries, different data sources, and alternative econometric methodologies. For example, implementation of a broad-based fixed exchange rate system is typically associated with a substantial reduction in macroeconomic volatility. Another finding, obtained from structural vector autoregression models, is that the changes in volatility for each variable are primarily driven by a fundamentally different type of disturbance.

Suggested Citation

  • Keating, John W. & Valcarcel, Victor J., 2017. "What's so great about the Great Moderation?," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 115-142.
    • Handle: RePEc:eee:jmacro:v:51:y:2017:i:c:p:115-142
    DOI: 10.1016/j.jmacro.2016.11.006
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    2. Plakandaras, Vasilios & Gupta, Rangan & Wohar, Mark E., 2018. "UK macroeconomic volatility: Historical evidence over seven centuries," Journal of Policy Modeling, Elsevier, vol. 40(4), pages 767-789.
    3. Vasilios Plakandaras & Rangan Gupta & Mark E. Wohar, 2017. "An Assessment of UK Macroeconomic Volatility: Historical Evidence Using Over Seven Centuries of Data," Working Papers 201779, University of Pretoria, Department of Economics.
    4. Max Soloschenko & Enzo Weber, 2021. "Trend-Cycle Interactions and the Subprime Crisis: Analysis of US and Canadian Output," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 17(2), pages 109-128, November.
    5. Davide Debortoli & Ricardo Nunes, 2014. "Monetary Regime Switches and Central Bank Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1591-1626, December.
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    7. Samuel Addo, 2018. "Policy regime changes and central bank prefernces," Working Papers 752, Economic Research Southern Africa.
    8. Ronald Henry Lange, 2018. "The Monetary Transmission Mechanism in Canada: A Time-Varying Vector Autoregression with Stochastic Volatility," Applied Economics and Finance, Redfame publishing, vol. 5(6), pages 42-51, November.

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    More about this item

    Keywords

    The Great Moderation; The Postwar Moderation; The Roaring Twenties Inflation Moderation; Stochastic volatility; Markov switching; Time-varying parameters; Markov chain Monte Carlo; Structural vector autoregression;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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