The Great Moderation

What Is the Great Moderation?

The Great Moderation is the name given to the period of diminished macroeconomic volatility experienced in the United States starting during the 1980s. During this period, the standard deviation of quarterly real gross domestic product (GDP) declined by half and the standard deviation of inflation declined by 66%, as indicated by figures reported by former U.S. Federal Reserve Chair Ben Bernanke. The Great Moderation can be summarized as a multi-decade period of low inflation and positive economic growth.

Key Takeaway

• The Great Moderation is the name given to the period of diminished macroeconomic volatility experienced in the United States from the mid-1980s to the financial crisis in 2007.
• In a discourse delivered in 2004, Bernanke speculated three possible reasons for the Great Moderation: structural change in the economy, worked on economic policies, and best of luck.
• Bernanke's commendation of the Great Moderation was distinctly premature, as it finished just a couple of years after the fact in the most terrible global recession since the Great Depression.

Grasping the Great Moderation

The Great Moderation followed a period of on occasion brutal swings in economic performance and inflation in the U.S. economy. From the 1960s Vietnam War inflation to the collapse of Bretton Woods to the stagflationary recessions of the 1970s to the time of unpredictable interest rates and inflation in the midst of a double-dip recession in the mid 1980s, the years leading up to the Great Moderation had some serious economic highs and lows.

The Great Moderation denoted a period when U.S. inflation stayed low and stable, and recessions, when they came, were somewhat gentle.

The Great Moderation as Portrayed by the Fed

The Great Moderation has been depicted as an outcome of the monetary policy system laid by Paul Volcker and went on by Alan Greenspan and Ben Bernanke during their spells as Federal Reserve chairs. In a discourse delivered in 2004, Bernanke speculated three expected reasons for the Great Moderation: structural change in the economy, worked on economic policies, and best of luck.

The structural changes Bernanke alluded to incorporated the widespread utilization of computers to enable more accurate business direction, advances in the financial system, deregulation, the economy's shift toward services, and increased receptiveness to trade.

Bernanke likewise pointed to further developed macroeconomic policies assisting with directing the large boom and bust cycles of the past, with numerous financial experts proposing that a continuous stabilizing of the U.S. economy associated with progressively sophisticated speculations of monetary and fiscal policy. At last, Bernanke alluded to studies showing that greater stability has come about because of a decline in economic shocks during this period, as opposed to a permanent improvement in stabilizing powers.

All things considered, Bernanke's discourse has been widely decided to have been prematurely self-salutary.

The Failure of the Great Moderation

A couple of years after Bernanke's discourse, the Great Moderation came to a crashing halt with the financial crisis and the Great Recession. Imbalances in the economy that had been allowed to build up for quite a long time or even a very long time by the Fed's pain free income policies all through the Great Moderation reached a crucial stage. The U.S. housing market collapsed and price inflation accelerated in mid 2008, freezing up the flow of credit and liquidity in financial markets, and encouraging the most horrendously awful global recession since the Great Depression.

This was made conceivable in light of the fact that the normal feedback components to monetary policy stopped working during the Great Moderation. The spread of globalization, interconnected financial markets, and the authority of the U.S. dollar in international trade had given the Fed's long term inflationary policies an outlet in foreign markets that really absorbed the price inflation that would somehow have quickly driven up the domestic price level and ruined the Fed's party. With each recessionary cycle that happened throughout the Great Moderation, the Fed had the option to just double down and swell more, covering up underlying issues in the economy by printing more money.

The Great Recession, when it came, addressed a trade-off among risk and stability: as opposed to allow moderate recessions to periodically run their course, Fed policymakers during the Great Moderation decided to run the long-term risk of a catastrophic crash to put off short-term pain.

Like a patient given painkillers and taught to keep strolling around on a broken leg by his doctor, the economy waded through gentle recessions in the mid 1990s and 2000s until it arrived at a last breaking point in 2008. The delicate economy that the Fed, and others, had worked through the Great Moderation ended in a fabulous global meltdown.