Is the Great Moderation Ending?——UK and US Evidence

Giorgio Canarella, Wen-Shwo Fang, Stephen M. Miller, Stephen K. Pollard

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DOI: 10.4236/me.2010.11002                

Abstract

The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories—good monetary policy, improved inventory management, or good luck. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist—energy-price and housing-price shocks.

Keywords

Great Moderation, Regime Switching, SWARCH

Conflicts of Interest

The authors declare no conflicts of interest.

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