On the Sources of the Great Moderation
59 Pages Posted: 27 Jul 2007
Date Written: September 2006
The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes.
Keywords: Great Moderation, structural VAR, technology shocks, monetary policy rules, labor hoarding
JEL Classification: E32
Suggested Citation: Suggested Citation