DP6632 On the Sources of the Great Moderation

Author(s): Jordi Galí , Luca Gambetti

Publication Date: January 2008

Keyword(s): Great Moderation , Labour hoarding , Monetary policy rules , Structural VARs , Technology Shocks

JEL(s): E32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6632.asp.asp

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 labour 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.