Definition
The Great Moderation refers to a period in U.S. history from the mid-1980s until 2007 characterized by a marked reduction in macroeconomic volatility, featuring stable economic growth and low inflation rates. Standard deviation metrics during this time indicated a significant decrease, with the overall standard deviation dropping by about half and inflation’s standard deviation declining by two-thirds.
| Great Moderation |
Economic Volatility |
| Low inflation and steady growth |
High inflation and erratic growth |
| Seen as beneficial for the economy |
Often causes uncertainty and instability |
Example
During the Great Moderation, it was not uncommon for policymakers and economists to celebrate consistent GDP growth like it was the new iPhone launch. However, much like every new gadget, some surprises were lurking, and in 2007—surprise!—the financial crisis hit like a toddler throwing a tantrum in a toy store.
- Inflation: The rate at which general prices for goods and services rise, eroding purchasing power. Think of it as the economy’s attempt to sneak extra calories into your diet without telling you.
- Economic Policies: Strategies implemented by governments or institutions to influence a nation’s economy. Often depicted as the “magic spells” used by policymakers to keep chaos at bay (or invite it in).
graph LR
A[Great Moderation] --> B[Low Inflation]
A --> C[Stable Growth]
B --> D[Decreased Standard Deviation]
C --> D
Humorous Insights & Fun Facts
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Former Fed Chair Ben Bernanke once called this period the “good old days,” but some economists believe he was just auditioning for a sitcom featuring a friendly but oblivious uncle who always believes he can smoothly solve problems with luck and policy magic.
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Fact: The Great Moderation may have lulled economists into a false sense of stability, much like the calm before an unexpected hurricane…
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“The economy is like a dog on a leash; every once in a while, it sees a squirrel (i.e., financial crisis) and takes off!” – Not Ben Bernanke.
Frequently Asked Questions
Q: Who coined the term Great Moderation?
A: The term was popularized by economists including Ben Bernanke during speeches and academic discussions in the early 2000s.
Q: What caused the Great Moderation?
A: Three potential causes are often cited: structural change in the economy (like tech advancements), better economic policies (thanks to all those economists), and sheer luck (which some say is more like chance).
Q: How did the Great Moderation end?
A: Ironically, it ended with the financial crisis of 2007, which many believe was the economy’s version of a dramatic plot twist!
Further Reading
- “The Great Moderation: a new view of the economic cycle” by Ben Bernanke
- “Macroeconomic Volatility, Financial Markets and Economic Growth” by Various Authors
- Online resources like EconLib and the Federal Reserve Economic Data (FRED) can provide insights on volatility measures and economic trends.
Test Your Knowledge: The Great Moderation Challenge
## What period does The Great Moderation refer to?
- [x] Mid-1980s to 2007
- [ ] 2007 to 2020
- [ ] 1970s to mid-1980s
- [ ] 1990s to the early 2000s
> **Explanation:** The correct answer is that The Great Moderation covers the period from the mid-1980s until the financial crisis in 2007.
## Which of the following was NOT a characteristic of The Great Moderation?
- [ ] Low inflation
- [x] High economic volatility
- [ ] Steady economic growth
- [ ] Decline in standard deviation
> **Explanation:** High economic volatility is not a characteristic of The Great Moderation; it was actually a period of reduced volatility!
## How did Ben Bernanke view The Great Moderation?
- [x] As a combination of good luck, better policies, and structural changes
- [ ] Solely due to technological advancements
- [ ] As pure chance without any influencing factors
- [ ] He was indifferent, thinking "meh"
> **Explanation:** Bernanke hypothesized that a mix of factors contributed to the Great Moderation.
## The financial crisis of 2007 can be seen as what?
- [x] A plot twist in the story of The Great Moderation
- [ ] The natural conclusion of successful policies
- [ ] A result of inflation standards dropping too low
- [ ] A miracle of economic stability
> **Explanation:** The 2007 financial crisis was indeed a surprising twist in the narrative of the previously stable period of The Great Moderation!
## What significant change occurred in inflation during The Great Moderation?
- [x] It standardized levels of fluctuations
- [ ] It increased beyond what economists predicted
- [ ] It became non-existant
- [ ] It turned jubilant
> **Explanation:** Inflation saw a decrease in its standard deviation, contributing to overall economic stability. No jubilation, though—just good old economic behavior!
## Which groups generally benefited during The Great Moderation?
- [ ] Poorly planned startups
- [x] Established businesses and consumers enjoying stable prices
- [ ] Economists who remained glum
- [ ] All of the above
> **Explanation:** Established businesses and consumers enjoyed a sense of stability, while economists clutched their pens, worried about the unexpected.
## What were policymakers deemed during The Great Moderation?
- [x] Heroes of stable economic environments
- [ ] People who really like pen margins
- [ ] Mad scientists experimenting on the economy
- [ ] Clueless individuals trying to order coffee
> **Explanation:** While often praised, the effectiveness of policymakers during the Great Moderation was later questioned!
## How did the era end?
- [ ] In a dance party of economists
- [x] With the 2007 financial crisis
- [ ] A joke gone too far
- [ ] A surprise holiday
> **Explanation:** The era ended abruptly with the financial crisis in 2007, proving fiscal parties rarely last forever.
## According to some economists, what was a potential cause of the Great Moderation?
- [ ] Eager party planners with spreadsheets
- [x] Improved economic policies
- [ ] Frequent economic tumbles without breaking
- [ ] The influence of world-class comedians
> **Explanation:** Improved economic policies are often pointed to as a reason for reduced volatility during the Great Moderation.
## Why might some consider The Great Moderation an illusion?
- [ ] Because it sounds too good to be true
- [x] It led to an eventual significant economic downturn
- [ ] Everyone got too comfy
- [ ] There were too many webinars about it
> **Explanation:** Critics may argue that the perceived smooth sailing of The Great Moderation was an illusion that masked the underlying economic risks, leading to the housing bubble burst.
Thank you for joining this hilarious exploration of The Great Moderation! Remember, the economy is like a box of chocolates—except it sometimes includes a surprise crisis! 🍫💔
