Council of Economic Advisers

Whatever Happened to the Great Moderation? Council of Economic Advisers

In the late 1990s, economists began a debate over what was termed the "Great Moderation," which refers to the reduction in the volatility of a wide range of economic variables, and to the associated increase in the longevity of economic expansions and reduction in the frequency and severity of economic contractions. The debate was not over whether or not there was a Great Moderation-on the heels of the longest economic expansion in American history it was generally agreed that the fact was real, and the relatively mild recession in 2001 only further strengthened the belief. Instead the debate was over what caused it. Was it better monetary or fiscal policy? Or improved inventory management? Or expansions in consumer credit? Or just good luck?The debate over the causes of the Great Moderation ended abruptly with the onset of the Great Recession in late 2007. With the worst economic crisis of our lifetimes still fresh in our minds, it shows little prospect of restarting anytime soon. If anything, the media appears to have become increasingly sensitive to day-to-day fluctuations in the stream of economic data reports. It is easy to remember a lot of the recent volatility, whether it is the S& P 500 rising more than 1 percent after the initial estimate of fourth-quarter GDP growth came in above expectations this past January, or falling 2 percent just a week later, attributed to news of a large drop in the new orders subcomponent of the ISM manufacturing index.