Paper #1041

Title:

On the sources of the Great Moderation

Authors:

Jordi Galí and Luca Gambetti

Date:

September 2006 (Revised: June 2007)

Abstract:

The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes.

Keywords:

Great Moderation, structural VAR, technology shocks, monetary policy rules, labor hoarding

JEL codes:

E32

Area of Research:

Macroeconomics and International Economics

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