Great Moderation

In economics, the Great Moderation was a reduction in the volatility of business cycle fluctuations starting in the mid-1980s, believed at that time to be permanent, and to have been caused by institutional and structural changes in developed nations in the later part of the twentieth century. Sometime during the mid-1980s major economic variables such as real gross domestic product growth, industrial production, monthly payroll employment and the unemployment rate began to decline in volatility.

These reductions are claimed by Ben Bernanke and others in the Federal reserve to be primarily due to greater independence of the central banks from political and financial influences which has allowed them to follow macroeconomic stabilisation by measures such as following the Taylor Principle. Furthermore, mainstream economics claim that information technology and greater flexibility in working practices also contribute to stability".

During the mid-1980s the U.S. macroeconomic volatility was largely reduced. This phenomenon was called a "great moderation" by and Mark Watson in their 2002 paper, "Has the Business Cycle Changed and Why?" It was brought to the attention of the wider public by Ben Bernanke (then member and now former chairman of the Board of Governors of the Federal Reserve) in a speech at the 2004 meetings of the Eastern Economic Association.

The Great Moderation has been attributed to various causes:

Since the Treasury-Fed Accord of 1951, the Federal Reserve was freed from the constraints of fiscal influence and gave way to the development of modern monetary policy. According to John B. Taylor, this allowed the Federal Reserve to abandon discretionary macroeconomic policy by the US Federal government to set new goals that would better benefit the economy. Through systematic monetary policy free from fiscal concerns, structured macroeconomic policy helped usher in the Great Moderation. Also, the Federal Reserve’s change in communicating its monetary policy plans contributed to the Great Moderation. The increased transparency could result in more effective monetary policy.

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