Sources of the Great Moderation: A Time-Series Analysis of GDP Subsectors

Posted: 21 Aug 2012

See all articles by Walter Enders

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies

Jun Ma

Northeastern University - Department of Economics

Date Written: March 9, 2010

Abstract

Recent work finds evidence that the volatility of the U.S. economy fell dramatically around the first quarter of 1984. We trace the timing of this so-called "Great Moderation" across many subsectors of the economy in order to better understand its root cause. We find that the interest rate sensitive sectors generally experience a much earlier volatility decline than other large sectors of the economy. The changes in Federal Reserve stabilization policies that occurred during the early 1980s support the view that improved monetary policy played an important role in stabilizing real economic activity. We find only mild evidence that “good luck” was important and little evidence to support the claim that improved inventory management was important.

Keywords: volatility reduction, endogenous break, Markov regime-switching, monetary policy

JEL Classification: C12, C22, E5

Suggested Citation

Enders, Walter and Ma, Jun, Sources of the Great Moderation: A Time-Series Analysis of GDP Subsectors (March 9, 2010). Journal of Economic Dynamics and Control, Vol. 35, No. 1, 2011, Available at SSRN: https://ssrn.com/abstract=2133409

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
200 Alston Hall
Tuscaloosa, AL 35487
United States
205-348-8972 (Phone)
205-348-0590 (Fax)

Jun Ma (Contact Author)

Northeastern University - Department of Economics ( email )

301 Lake Hall
360 Huntington Avenue
Boston, MA MA 02446
United States

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