Is the Great Moderation Now Over?

A year ago I interviewed Mark Thoma of Economist's View blog about the Great Moderation. (You can listen to it here by scrolling down to the bottom.) For you non-economists, the Great Moderation is the period of calmer economic activity that we've experienced since 1983. Quarter-to-quarter changes in GDP are closer to average, the frequency of recessions has gone down, and the severity of recessions has become less. It's pretty cool.

With the recent turmoil in the economy, I was curious if he had changed his views about whether the Great Moderation was continuing, and would continue. You can listen here.

For a graphical view of the Great Moderation, I calculated the standard deviation of quarter-to-quarter changes in real GDP over rolling 5-year periods. It's stunning how much we've calmed down.

Comments

[carey_jim:]

The unspoken correlation seems to be the fall of communism in 1989.

The fall of communism resulted in less money diverted into military spending and more trade with China and Russia for our mutual benefit.

It looks like we've squandered this extraordinary opportunity for a century of peace and prosperity with the entire world working towards more social justice, freedom and economic equity and less poverty in the entire world.

Instead we have tried to crush Russia completely, which we should have known was not only impossible but extremely dangerous.

We've allowed ourselves to get into massive debt with our formal mortal enemy, the Chinese communists.

And, during this period, the world has seen countless wars, revolutions and genocides which the United States has mostly been unable to prevent or have any influence over.

And in America itself, for the last 20 years at least, we have had mindless, hedonistic consumption by the super rich and upper middle classes at the expense of the poor who have gotten much poorer and which has caused devastating destruction of the natural environment.

"Moderation" does not seem to be the right word to describe what has happened during the last twenty years, to put it mildly.

2008 Oct 08 01:13 PM