On the Sources of the Great Moderation
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. Among other changes, our findings point to (i) an increase in the volatility of hours relative to output, (ii) a shrinking contribution of non-technology shocks to output volatility, and (iii) a change in the cyclical response of labor productivity to those shocks. That evidence suggests a more complex picture than that associated with "good luck" explanations of the Great Moderation.
We are grateful for comments and suggestions to R?gis Barnichon, Olivier Blanchard, Steve Davis, Davide Debortoli, Luigi Guiso, Sharon Kozicki, Steve Nickell, Gabriel P?rez-Quir?s, Valerie Ramey, Thijs van Rens, Todd Walker, Mark Watson, two anonymous referees, and participants in numerous seminars and conferences. The authors acknowledge the financial support from Ministerio de Educaci?n y Ciencia (grants SEJ 2005-01124 and SEJ-2004-21682-E, respectively), the Barcelona GSE Research Network, and the Generalitat de Catalunya. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Jordi Galí & Luca Gambetti, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January citation courtesy of
Luca Gambetti & Jordi GalÃ, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov. citation courtesy of