Great Moderation

In economics, the Great Moderation is the reduction in the volatility of business cycle fluctuations in developed nations starting in the mid-1980s, compared with the decades before. It is believed to be caused by institutional and structural changes, particularly in central bank policies, in the later half of the twentieth century. In economics, the Great Moderation is the reduction in the volatility of business cycle fluctuations in developed nations starting in the mid-1980s, compared with the decades before. It is believed to be caused by institutional and structural changes, particularly in central bank policies, in the later half of the twentieth century. Sometime during the mid-1980s major economic variables such as real gross domestic product growth, industrial production, monthly payroll employment and the unemployment rate began to decline in volatility. These reductions are claimed by Ben Bernanke and others in the US Federal Reserve to be primarily due to greater independence of the central banks from political and financial influences which has allowed them to follow macroeconomic stabilisation, by measures such as following the Taylor rule. Additionally, economists believe that information technology and greater flexibility in working practices contributed to increasing macroeconomic stability. The term was coined in 2002 by James Stock and Mark Watson to describe the observed reduction in business cycle volatility. These reductions are believed to be permanent, however, some economists, such as John Quiggin, have argued that the late-2000s economic and financial crisis have brought the Great Moderation period to an end, so that its span was 1987-2007. During the mid-1980s the U.S. macroeconomic volatility was largely reduced. This phenomenon was called a 'great moderation' by James Stock and Mark Watson in their 2002 paper, 'Has the Business Cycle Changed and Why?' It was brought to the attention of the wider public by Ben Bernanke (then member and later chairman of the Board of Governors of the Federal Reserve) in a speech at the 2004 meetings of the Eastern Economic Association.