Jeremy M. Piger

Michelle T. Armesto

English

Research Papers in Economics

August 2005 InternationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
M
acroeconomic activity in the United States has
been substantially less volatile since the early
1980s, a phenomenon that has been dubbed the
“Great Moderation.” The chart illustrates this fact with a plot
of the growth rate of U.S. real gross domestic product (GDP)
since the early 1950s. The standard deviation of quarterly
real GDP growth, a statistical measure of variability, was
4.7 percentage points before 1984, the year commonly
assigned to the beginning of the Great Moderation. After
1984, this standard deviation fell to 2.1 percentage points,
a decline of more than half. 
Other things equal, smoother economic activity has many
potential benefits. For example, businesses enjoy less uncer-
tainty when they make investment decisions, while individuals
experience smaller swings in their income and consumption.
Also, economic recessions—the most costly phase of the
business cycle in terms of wasted resources—have become
less frequent and less severe since the beginning of the
Great Moderation.
While the Great Moderation in the United States has been
extensively discussed, recent research has found evidence
for moderations in the business cycles of other countries as
well. Economists James Stock and Mark Watson1 document
significant reductions in the volatility of real GDP growth
for several G7 countries over the past 50 years. However,
the particular pattern of the moderation often differs
from that seen in the United States. For example, the
reductions in macroeconomic volatility observed in
Germany, Italy, and the United Kingdom all
began earlier and were far more gradual than that
observed in the United States. On the other hand,
Canada’s reduction in volatility did not occur until
the early 1990s, later than in the United States.
Japan displayed falling volatility during the 1970s,
but has actually experienced a rebound in volatility
since the early 1980s. Finally, France was the only
G7 country for which volatility appeared approxi-
mately constant over the sample period. 
Why has the volatility of output growth fallen
in the United States and abroad? One possibility is
that improved macroeconomic policy has tamed the
business cycle. For example, in many countries the
conduct of monetary policy is thought to have
improved in recent decades, as central banks have gained
increased independence and become more committed to the
goal of price stability. Stock and Watson considered the
possibility that improved monetary policy generated the
Great Moderation. To investigate this claim, they conducted
counterfactual experiments using theoretical models that
attempted to ask the following question: If the conduct of
monetary policy had never changed, would the Great
Moderation have occurred? Stock and Watson found only
a small role for improved monetary policy in explaining the
reduction in the volatility of output growth in the G7
economies. Instead, they argue that most of the reduction in
volatility comes from a lessening of common international
“shocks,” such as the large disruptions in the supply of oil
that occurred in the 1970s. This conclusion is somewhat
discouraging, as it suggests that if such shocks return, macro-
economic volatility will also. Discovering the source of the
Great Moderation, both at home and abroad, remains an
active area of research for macroeconomists. 
—Michelle T. Armesto and Jeremy M. Piger
1Stock, James H. and Watson, Mark W. “Has the Business Cycle Changed?
Evidence and Explanations.” Symposium, Monetary Policy and Uncertainty:
Adapting to a Changing Economy, Jackson Hole, Wyoming, August 28-30
2003, pp. 9-56.
International Perspectives on the “Great Moderation”
1952 - Q1
1956 - Q1
1960 - Q1
1964 - Q1
1968 - Q1
1972 - Q1
1976 - Q1
1980 - Q1
1984 - Q1
1988 - Q1
1992 - Q1
1996 - Q1
2000 - Q1
2004 - Q1
Rate of GDP Growth
20.00
15.00
10.00
5.00
0.00
–5.00
–10.00
–20.00
4.7% = standard deviation 
prior to 1984
2.1% = standard deviation 
after 1984
Consult ALFRED™, our new source of vintage economic data, at research.stlouisfed.org/tips/alfred/.

International perspectives on the "Great Moderation"

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International perspectives on the "Great Moderation"

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