The recent financial and economic turmoil has led to claims that the stabilization of the economy for the past 25 years is now over or was even a ‘myth’ in the first place. But economist James Morley argues that pronouncements of the end of the ‘Great Moderation’* are premature.
Morley is an associate professor of economics at Washington University in St. Louis.
His research and that of other empirical macroeconomists suggests that the stabilization of the economy was never primarily the result of ‘better policy’ or long-term changes in financial markets taming the business cycle.
Instead, Morley finds, “the Great Moderation was mostly about lower volatility within economic expansions due to technological changes, rather than the elimination of recessions.” The stabilizing influence of technology bodes well for the recovery according to Morley, “it means that the relative stability of the 1990s and 2000s compared to the 1970s should continue once the economy has recovered from the recent severe recession.”
This research is summarized in a recent analysis that Morley wrote for Macroeconomic Advisers, LLC, a macroeconomic forecasting firm headquartered in Clayton, MO.
“The Great Moderation: What Caused It and Is It Over?” Macroeconomic Advisers’ Macro Focus, Vol. 4, No. 8, pp. 1-11, December 2, 2009. (http://artsci.wustl.edu/~morley/great_moderation.pdf)
*The idea of “the Great Moderation” came to widespread public attention in a 2004 speech by then-Federal Reserve Governor Ben Bernanke. He began his speech with a statement of empirical fact: “One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility.”