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Greater Moderations

John Keating and Victor (Vic) Valcarcel

No 201202, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We decompose a 219 year sample of U.S. real output data into permanent and transitory shocks. We find reductions in volatility of output growth and inflation, starting in the mid 1980s, consistent with the “Great Moderation” noted by many others. More importantly, we find periods of even more substantial reduction in volatilities. Output growth and inflation volatilities fell by 60% and 76%, respectively, from shortly after World War II until the mid 1960s. We label this period the Postwar Moderation. Also, the largest reduction in inflation volatility occurred during the Classical Gold Standard period. Results from our empirical model suggest that aggregate supply shocks account for most of the changes in output growth volatility while aggregate demand shocks account for most of the changes in inflation volatility. The timing of the Postwar Moderation, which began almost immediately after passage of the Employment Act of 1946, suggests that policy played a crucial role in this period’s impressive decline in volatilities.

Keywords: The Great Moderation; stochastic volatility; structural VAR (search for similar items in EconPapers)
JEL-codes: E30 E31 E65 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2012-02
New Economics Papers: this item is included in nep-his and nep-mac
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Citations: View citations in EconPapers (4) Track citations by RSS feed

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