VAR analysis and the Great Moderation

Most analyses of the U.S. Great Moderation have been based on structural VAR methods, and have consistently pointed towards good luck as the main explanation for the greater macroeconomic stability of recent years. Based on an estimated New-Keynesian model in which the only source of change is the move from passive to active monetary policy, we show that VARs may misinterpret good policy for good luck. First, the policy shift is suficient to generate decreases in the theoretical innovation variances for all series, and decreases in the variances of inflation and the output gap, without any need of sunspot shocks. With sunspots, the estimated model exhibits decreases in both variances and innovation variances for all series. Second, policy counterfactuals based on the theoretical structural VAR representations of the model under the two regimes fail to capture the truth, whereas impulse-response functions to a monetary policy shock exhibit little change across regimes. Since these results are in line with those found in the structural VARbased literature on the Great Moderation, our analysis suggests that existing VAR evidence is compatible with the ‘good policy’ explanation of the Great Moderation. JEL Classification: E38, E52DSGE Models, Great Moderation, indeterminacy, vector autoregressions

Coping With Racism: Moderators of the Discrimination-Adjustment Link Among Mexican-Origin Adolescents

What strategies help ethnic minority adolescents to cope with racism? The present study addressed this question by testing the role of ethnic identity, social support, and anger expression and suppression as moderators of the discrimination-adjustment link among 269 Mexican-origin adolescents (Mage = 14.1 years), 12-17 years old from the Midwestern U.S. Results from multilevel moderation analyses indicated that ethnic identity, social support, and anger suppression, respectively, significantly attenuated the relations between discrimination and adjustment problems, whereas outward anger expression exacerbated these relations. Moderation effects differed according to the level of analysis. By identifying effective coping strategies in the discrimination-adjustment link at specific levels of analysis, the present findings can guide future intervention efforts for Latino youth

Vector Autoregression Analysis and the Great Moderation

Most analyses of the U.S. Great Moderation have been based on VAR methods, and have consistently pointed toward good luck as the main explanation for the greater macroeconomic stability of recent years. Using data generated by a New-Keynesian model in which the only source of change is the move from passive to active monetary policy, we show that VARs may misinterpret good policy for good luck. In particular, we detect significant breaks in estimated VAR innovation variances, although in the data generating process the volatilities of the structural shocks are constant across policy regimes. Counterfactual simulations, structural and reduced-form, point toward the incorrect conclusion of good luck. Our results cast doubts on the existing notion that VAR evidence is inconsistent with the good policy explanation of the Great Moderation.

The great moderation under the microscope: decomposition of macroeconomic cycles in US and UK aggregate demand

In this paper the relationship between the growth of real GDP components is explored in the frequency domain using both static and dynamic wavelet analysis. This analysis is carried out separately for the US and UK using quarterly data, and the results are found to be substantially different for the two countries. One of the key findings of this research is that the ‘great moderation’ shows up only at certain frequencies, and not in all components of real GDP. We use these results to explain why the incidence of the great moderation has been so patchy across GDP components, countries and time periods. This also explains why it has been so hard to detect periods of moderation (or other periods) reliably in the aggregate data. We argue this cannot be done without separating the GDP components into their frequency components over time. Our results show why: the predictions of traditional real business cycle theory often appear not to be upheld in the data.business cycles; growth cycles; discrete wavelet analysis; US real GDP; UK real GDP

A state-level analysis of the Great Moderation

A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data and find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-important reductions in volatility. We then exploit this cross sectional heterogeneity to evaluate hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively high concentrations in the durable-goods and extractive industries tended to experience later breaks. We interpret these results as contradictory to hypotheses that the Great Moderation could have been caused by improved inventory management or less-volatile shocks to energy and/or productivity. Instead, we find results that are more consistent with the view that the most significant contributor to the volatility reduction was improved monetary policy.Macroeconomics ; Econometric models ; Monetary policy

The Great Moderation in the euro area: What role have macroeconomic policies played ?

Most OECD countries have experienced a sharp reduction in the volatility of output and inflation over the past three decades. Although this Great Moderation process has stirred considerable interest in economic and policy circles, research on its causes has so far tended to focus on the US economy and has produced relatively little empirical evidence on the euro area or other non-US OECD countries. This paper contributes to fill in the gap by providing a euro-area view of the Great Moderation process and by assessing the euro-area experience against developments in other OECD countries. Its main focus is on the possible role of macroeconomic policies. After reviewing a set of key stylised facts of the fall in output growth volatility in the euro area, the paper discusses the possible channels through which economic policies may have contributed to the Great Moderation and resents the results of an econometric panel analysis of the determinants of output growth volatility. Its main conclusion is that the Great Moderation is not just the result of a long period of luck in the form of milder shocks but can also partly be ascribed to changes in economic policies, in particular improvements in the conduct of monetary policy and, to a lesser extent, more powerful automatic fiscal stabilisers.macroeconomic volatility, great moderation, euro area, Gonzalez Cabanillas, Ruscher

A State-Level Analysis of the Great Moderation

A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data, find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-significant reduction in volatility. We then exploit this cross-sectional heterogeneity to evaluate three hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively higher manufacturing concentration experience later breaks, a result that tends to contradict improved inventory management and a decline in the volatility of productivity shocks as possible explanations. Our results, then, are more consistent with monetary policy as the origin of the aggregate volatility reductiondisaggregation, volatility reduction, Markov-switching

Wavelet variance and correlation analyses of output in G7 countries

In this paper we apply the wavelets methodology to the analysis of the industrial production index of the G-7 countries between 1961:1-2005:5. The analysis is performed using a multi-scaling approach which decomposes the variance of the industrial production index and the covariance between the industrial production indices of two countries on a scale-by-scale basis through a non-orthogonal variant of the classical discrete wavelet transform, i.e. the maximal overlap discrete wavelet transform (MODWT). Wavelet variance analysis does not provide evidence of an international patterns of moderation in output volatility, as the moderation of output volatility occurred after the early eighties is confirmed only for the Euro-area countries plus Japan. Moreover, wavelet correlation analysis different correlation patterns at the different time-scale components and, that, with some exceptions, the linkages between countries are mostly significant only at the business cycle time scales, with the strongest relationships between the Anglo countries (particularly Canada and US), France and Germany, Japan and the Euro- zone countries, with Italy displaying the closest links with France.time-scale decomposition analysis, wavelets, business cycle fluctuations

Detecting recessions in the Great Moderation: a real-time analysis

The nature of the business cycle, particularly in the United States, has changed dramatically over the past several decades. In the 1970s and early 1980s, the U.S. economy often whipsawed up and down. Since then, real economic activity stabilized considerably, entering a period economists call the “Great Moderation.” With the ups and downs of the economy becoming less dramatic, it has become harder to determine in real-time when the economy dips into recession. ; Economists have a variety of methods to determine when the economy is entering a recession. These methods range from directly analyzing a broad spectrum of data to the formal use of recession prediction models. The National Bureau of Economic Research (NBER) uses the first approach, relying on several data series to make a determination of when the economy enters or exits a recession. Their decisions are intended to be accurate, not timely. More formal recession prediction models are designed to send a timely signal, but often do not take account of how the Great Moderation has altered the business cycle. ; Davig uses a framework that efficiently uses a large set of data in a “business cycle tracking” model. The model accounts for shifts in overall economic volatility – to capture the Great Moderation – and sends a signal when the economy is shifting between periods of low and high economic activity. The model can be used in different ways to extract a signal regarding whether the economy is likely heading for an NBER recession.