From the Collaborative Bond and Money Market Data Portal
The Great Moderation refers to a period of macroeconomic stability in the developed world, generally defined as lasting from the end of the Volcker Shock in 1982 to the start of the Global Financial Crisis (GFC) in 2007. Some authors extend the Great Moderation to the present day, arguing that the crisis was merely a temporary blip and that macroeconomic stability has resumed following the abatement of the crisis, but this is a heterodox use of the term.
The period is characterised by generally milder business cycle fluctuations in development nations, low and stable inflation, and lower volatility in fundamental macroeconomic variables, such as real GDP and unemployment. The macroeconomic stability is contrasted with the volatile and inflationary period which preceded the Great Moderation.
The term was coined by economists James Stock and Mark Watson in a 2002. However, the term is most associated with Ben Bernanke, then a Board of Governors of the Federal Reserve and later Chairman, who discussed the concept extensively in a 2004 speech.
Economists debate on the causes of macroeconomic stability which define the Great Moderation. A commonly cited cause is the rise of independent central banking. For example, in 1997, the Bank of England became operationally independent from the UK government, allowing the central bank to have full autonomy in decisions on how to achieve its inflation target. This reduces policy uncertainty since it removes the political influence on the Bank of England’s rate-setting, ensuring price stability.
The relative absence of externals shocks is another factor commonly cited in the literature as potential cause.
