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Economic SYNOPSES
short essays and reports on the economic issues of the day
2005 ■ Number 19

International Perspectives on the “Great Moderation”
Michelle T. Armesto and Jeremy M. Piger
acroeconomic activity in the United States has been
policy is thought to have improved in recent decades, as censubstantially less volatile since the early 1980s, a
tral banks have gained increased independence and become
phenomenon that has been dubbed the “Great
more committed to the goal of price stability. Stock and Watson
Moderation.” The chart illustrates this fact with a plot of the
considered the possibility that improved monetary policy
growth rate of U.S. real gross domestic product (GDP) since
generated the Great Moderation. To investigate this claim,
the early 1950s. The standard deviation of quarterly real GDP
they conducted counterfactual experiments using theoretical
growth, a statistical measure of variability, was 4.7 percentage
models that attempted to ask the following question: If the
points before 1984, the year commonly assigned to the beginconduct of monetary policy had never changed, would the
ning of the Great Moderation. After 1984, this standard deviGreat Moderation have occurred? Stock and Watson found
ation fell to 2.1 percentage points, a decline of more than half.
only a small role for improved monetary policy in explaining
Other things equal, smoother economic activity has many
the reduction in the volatility of output growth in the G7
potential benefits. For example, businesses enjoy less uncereconomies. Instead, they argue that most of the reduction in
tainty when they make investment decisions, while individuals
volatility comes from a lessening of common international
experience smaller swings in their income and consumption.
“shocks,” such as the large disruptions in the supply of oil
Also, economic recessions—the most costly phase of the
that occurred in the 1970s. This conclusion is somewhat disbusiness cycle in terms of wasted resources—have become
couraging, as it suggests that if such shocks return, macroless frequent and less severe since the beginning of the Great
economic volatility will also. Discovering the source of the
Moderation.
Great Moderation, both at home and abroad, remains an active
While the Great Moderation in the United States has been
area of research for macroeconomists. ■
extensively discussed, recent research has found evidence for
1
Stock, James H. and Watson, Mark W. “Has the Business Cycle Changed? Evidence
moderations in the business cycles of other countries as well.
and
Explanations.” Symposium, Monetary Policy and Uncertainty: Adapting to a
1
Economists James Stock and Mark Watson document signifiChanging Economy, Jackson Hole, Wyoming, August 28-30 2003, pp. 9-56.
cant reductions in the volatility of real GDP growth for several
G7 countries over the past 50 years. However, the particular pattern of the moderation often differs from that seen
Rate of GDP Growth
in the United States. For example, the reductions in
20.00
2.1% = standard deviation
4.7% = standard deviation
macroeconomic volatility observed in Germany, Italy,
after 1984
prior to 1984
15.00
and the United Kingdom all began earlier and were far
more gradual than that observed in the United States.
10.00
On the other hand, Canada’s reduction in volatility did
not occur until the early 1990s, later than in the United
5.00
States. Japan displayed falling volatility during the 1970s,
0.00
but has actually experienced a rebound in volatility since
the early 1980s. Finally, France was the only G7 country
–5.00
for which volatility appeared approximately constant
–10.00
over the sample period.
Why has the volatility of output growth fallen in the
–20.00
United States and abroad? One possibility is that improved
macroeconomic policy has tamed the business cycle. For
example, in many countries the conduct of monetary
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Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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