Macroeconomic Volatility, Predictability, and Uncertainty in the Great Moderation

Abstract

I examine the extent to which the large decline in observed real output volatility, that is, the great moderation, can be attributed to changes in macroeconomic uncertainty and macroeconomic predictability using forecasts of future real output growth from the Survey of Professional Forecasters (SPF). The results indicate that both predictability and uncertainty have declined over the great moderation. The results indicate that measuring the decline in macroeconomic uncertainty with the volatility of shocks from a fixed-parameter autoregressive model overstates the decline in uncertainty by between 20% and 25%. I examine how this overstatement affects predictions of the equity premium in the consumption capital asset pricing model (CCAPM), and I relate the decline in predictability to a significant change in the relationship between SPF forecasts and key measures of current macroeconomic performance.