Abstract
The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories—good monetary policy, improved inventory management, or good luck. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist—energy-price and housing-price shocks.
Highlights
Time-series patterns of real output growth, like many other economic and financial time series, exhibit periods of high volatility followed by periods of low volatility
The Great Moderation in the US and the UK begin at different point in time
The explanations for the Great Moderation fall into generally three different categories—good monetary policy, improved inventory management, or good luck
Summary
Time-series patterns of real output growth, like many other economic and financial time series, exhibit periods of high volatility followed by periods of low volatility. In a series of influential papers References [9] and [10] propose a Markov-switching technique to analyze nonstationary time series and to model structural breaks endogenously. This approach introduces a appealing feature in that it allows the dating of low versus high volatility regimes and, avoids any ad hoc partitioning of the sample path. We apply this methodology to analyze, once again, the Great Moderation with a new twist.
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