Discussion paper

DP10825 The Great Moderation in historical perspective.Is it that great?

The Great Moderation (GM) is widely documented in the literature as one of the most important changes in the US business cycle. All the papers that analyze it use post WWII data. In this paper, for the first time we place the GM in a long historical perspective, stretching back a century and a half, which includes secular changes in the economic structure and a substantial reduction of output volatility. We find two robust structural breaks in volatility at the end of WWII and in the mid-eighties, showing that the GM still holds in the longer perspective. Furthermore, we show that GM volatility reduction is only linked to expansion features. We also date the US business cycle in the long run, finding that volatility plays a primary role in the definition of the business
cycle, which has important consequences for econometricians and forecasters.


Pérez Quirós, G, M Gadea Rivas and A Gomez-Loscos (2015), ‘DP10825 The Great Moderation in historical perspective.Is it that great?‘, CEPR Discussion Paper No. 10825. CEPR Press, Paris & London. https://cepr.org/publications/dp10825