what is the great moderation 
the great moderation is the name given to the period of decreased macroeconomic volatility experienced in the united states starting in the 1980s during this period the standard deviation of quarterly real gross domestic product gdp declined by half and the standard deviation of inflation declined by two thirds according to figures reported by former u s federal reserve chair ben bernanke 1 the great moderation can be summed up as a multi decade period of low inflation and positive economic growth understanding the great moderationthe great moderation followed a period of at times violent swings in economic performance and inflation in the u s economy from the 1960s vietnam war inflation to the collapse of bretton woods to the stagflationary recessions of the 1970s to the era of volatile interest rates and inflation amid a double dip recession in the early 1980s the years leading up to the great moderation had some severe economic ups and downs the great moderation marked a period when u s inflation remained low and stable and recessions when they came were relatively mild the great moderation as portrayed by the fedthe great moderation has been portrayed as an outcome of the monetary policy framework laid by paul volcker and continued by alan greenspan and ben bernanke during their stints as federal reserve chairs in a speech delivered in 2004 bernanke hypothesized three potential causes for the great moderation structural change in the economy improved economic policies and good luck 1the structural changes bernanke referred to included the widespread use of computers to enable more accurate business decision making advances in the financial system deregulation the economy s shift toward services and increased openness to trade 1bernanke also pointed to improved macroeconomic policies helping to moderate the large boom and bust cycles of the past with many economists suggesting that a gradual stabilizing of the u s economy correlated with increasingly sophisticated theories of monetary and fiscal policy finally bernanke referred to studies indicating that greater stability has resulted from a decrease in economic shocks during this period rather than a permanent improvement in stabilizing forces 1in retrospect bernanke s speech has been widely judged to have been prematurely self congratulatory the failure of the great moderationa few years after bernanke s speech the great moderation came to a crashing halt with the financial crisis and the great recession imbalances in the economy that had been allowed to build up for years or even decades by the fed s easy money policies throughout the great moderation came to a head the u s housing market collapsed and price inflation accelerated in early 2008 freezing up the flow of credit and liquidity in financial markets and precipitating the worst global recession since the great depression this was made possible because the normal feedback mechanisms to monetary policy stopped working during the great moderation the spread of globalization interconnected financial markets and the hegemony of the u s dollar in international trade had given the fed s decades long inflationary policies an outlet in foreign markets that effectively soaked up the price inflation that would otherwise have rapidly driven up the domestic price level and spoiled the fed s party with each recessionary cycle that occurred over the course of the great moderation the fed was able to simply double down and inflate more papering over underlying problems in the economy by printing more money the great recession when it came represented a trade off between risk and stability rather than allow moderate recessions to periodically run their course fed policymakers during the great moderation chose to run the long term risk of a catastrophic crash in order to put off short term pain like a patient given painkillers and instructed to continue walking around on a broken leg by his doctor the economy muddled through mild recessions in the early 1990s and 2000s until it reached a final breaking point in 2008 the fragile economy that the fed and others had built through the great moderation ended in a spectacular global meltdown 