Great Moderation, RIP?

Yuriy Gorodnichenko does some of the funnest research in macroeconomics. I’ve seen him talk about the Finnish Great Depression (subtitle: “From Russia with Love”) and his test of some theories of informational rigidity. His work is very empirically oriented, but takes theories seriously.

Today on voxeu he explores the question of whether the most recent recession implies the end of the Great Moderation. His answer: no.

7 thoughts on “Great Moderation, RIP?”

  1. It’s a recurring theme of my trolling in your comment section that maybe it’s a good idea not to view the recent events as a “business cycle” phenomenon, but rather as a unique event of sorts, much like a war.

    One can bite the bullet and claim that recent quarters are draws from a stable process, in which case the question of whether this process is characterized by “great moderation” is meaningful, or one can interpret this as a one-time fudge-up in a particularly large market (housing financing).

    This is hard for us because while studying Lucas on method we were told to think of all aggregate fluctuations are being drawn from the same stable process and that to think otherwise is somehow betrayal or bordering on tautology or inability to say anything. I’m not sure that was the best of the lessons.

    Sidenote: am I the only one who finds it curious that RBC types calibrate to the “post-WW2” sample while the NK types calibrate to the “post-70s/early-80s” sample?

  2. I don’t mind his economics. Anyway, I don’t think he talks about this in that article. The Great Moderation is just the decrease in volitility I showed in in that graph the other day. We don’t know if the decrease is due to better policy, good luck, or just the fact we’ve been hit with fewer really bad shocks. The Fed likes to think its due to better policy on their part.

  3. Could the great moderation be caused by the law of large numbers and the increasing numbers of people moving beyond subsistence. If economic fluctuations are basically random, then larger groups of people/firms and institutions with more diverse controls should have smaller fluctuations.

  4. Yeah, better insurance would explain a moderation of consumption. Would it moderate output? My model-free guess is that insurance would make output more variable as people would be free to take more chances. OTOH, maybe the chances people take are less correlated in a better insured world for some reason and so individual variability in output would go up but they’d wash in the aggregate?

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