Is the Great Moderation Ending? UK and US Evidence
Modern Economy, May 2010
51 Pages Posted: 19 Aug 2008 Last revised: 26 Dec 2010
Date Written: July 14, 2008
The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories - good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist - energy-price and housing-price shocks.
Keywords: Great Moderation, Regime switching, SWARCH
JEL Classification: C32, E32, O40
Suggested Citation: Suggested Citation