Is the Great Moderation Ending? UK and US Evidence

Modern Economy, May 2010

51 Pages Posted: 19 Aug 2008 Last revised: 26 Dec 2010

See all articles by Giorgio Canarella

Giorgio Canarella

California State University, Los Angeles - Department of Economics & Statistics; University of Nevada, Las Vegas

Wen-Shwo Fang

Feng Chia University - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Stephen K. Pollard

TUI University

Date Written: July 14, 2008

Abstract

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

Canarella, Giorgio and Fang, Wen-Shwo and Miller, Stephen M. and Pollard, Stephen K., Is the Great Moderation Ending? UK and US Evidence (July 14, 2008). Modern Economy, May 2010. Available at SSRN: https://ssrn.com/abstract=1234408

Giorgio Canarella

California State University, Los Angeles - Department of Economics & Statistics ( email )

Los Angeles
Los Angeles, CA 90032
United States

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Wen-Shwo Fang

Feng Chia University - Department of Economics ( email )

100, WenHwa Rd
Talchung
Taiwan

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

Stephen K. Pollard

TUI University ( email )

5665 Plaza Dr., 3rd Floor
CA, 90630
Cypress, CA 90630
United States

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