Great Moderations and U.S. Interest Rates: Unconditional Evidence
James M. Nason
Federal Reserve Bank of Philadelphia
Gregor W. Smith
Queen's University (Canada)
May 1, 2008
FRB Atlanta Working Paper No. 2008-1
The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier, 1946 moderation in output and consumption growth was comparable to that of 1984. Using quarterly data since 1947, we also isolate the 1969-83 Great Inflation to refine the asset pricing implications of the moderations. Asset pricing theory predicts that moderations - real or nominal - influence interest rates. We examine the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of U.S. interest rates. A central finding is that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth.
Number of Pages in PDF File: 41
Keywords: Great Moderation, asset pricing, interest rate
JEL Classification: E32, E43, N12working papers series
Date posted: January 23, 2008 ; Last revised: July 27, 2008
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