Great Moderation - Causes

Causes

The Great Moderation has been attributed to various causes:

• Improved government economic stabilization policy (particularly monetary policy)
• Greater central bank independence, in which the Fed balanced money supply more closely with demand
• Reduced, or stabilized, government regulation and taxation
• Improved inventory control and supply chain management
• Economic good luck (partly from productivity and commodity price shocks)

Researchers at the US Federal Reserve and at the European Central Bank have rejected the 'good luck' explanation and attribute it mainly to improved monetary policies. According to John B. Taylor, originator of the Taylor rule, the Great Moderation resulted from the abandonment of discretionary macroeconomic policy by the federal government, and the adoption of a rules-based macroeconomic policy instead (working mainly through monetary policy). Research has indicated that U.S. monetary policy contributed to the drop in the volatility of U.S. output fluctuations and to the decoupling of household investment from the business cycle that characterized the Great Moderation.