The Great Moderation, Dead or Alive?

Abstract

On February 20, 2004, Ben Bernanke, Chairman of the Federal Reserve, reflected on a trend that by then had attracted the attention of much of the macroeconomics profession: “One of the most striking features of the economic landscape over the past 20 years or so has been a substantial decline in macroeconomic volatility.” This stability was very significant and pervasive across both developed and developing countries. The variability of quarterly growth real output (as measured by its standard deviation) [in the U.S.] had declined by half since the mid-1980s, while the variability of quarterly inflation has declined by about two thirds. Several writers on the topic have dubbed this decline in aggregate volatility “the Great Moderation”…