The Sources of the Great Moderation: A Survey

Abstract

The decades preceding the outbreak of the financial crisis in August of 2007 were a period of exceptional stability for the US economy. A number of studies over the past decade proposed different theoretical rationales and underpinning empirical evidence to explain the so-called Great Moderation. These explanations can be categorized in three main groups: good luck; good policy; and good practice. This study reviews and evaluates the growing literature on the sources of the Great Moderation. We find that substantial debate still surrounds the underlining causes of reduction in output volatility, and suggests new aspects to expand the existing studies.