Great Moderation

rdf:langString Great Moderation

rdf:langString The Great Moderation is a period in the United States of America starting from the mid-1980s until at least 2007 characterized by the reduction in the volatility of business cycle fluctuations in developed nations compared with the decades before. It is believed to be caused by institutional and structural changes, particularly in central bank policies, in the second 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. During this period, growth in price levels dropped substantially whilst hourly compensation continued to increase, and interest rates started to fall. The period also saw a large increase in household net wealth and income, whilst wealth inequality increased along various measures. Ben Bernanke and others in the US Federal Reserve (the Fed) claim that the Great Moderation is 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. There is a debate pertaining to whether the Great Moderation ended with the late-2000s economic and financial crisis, or if it continued beyond this date with the crisis being an anomaly.