Working Paper: CEPR ID: DP10825
Authors: Maria Dolores Gadea; Ana Gomezloscos; Gabriel Perezquiros
Abstract: The Great Moderation (GM) is widely documented in the literature as one of the most important changes in the US business cycle. All the papers that analyze it use post WWII data. In this paper, for the first time we place the GM in a long historical perspective, stretching back a century and a half, which includes secular changes in the economic structure and a substantial reduction of output volatility. We find two robust structural breaks in volatility at the end of WWII and in the mid-eighties, showing that the GM still holds in the longer perspective. Furthermore, we show that GM volatility reduction is only linked to expansion features. We also date the US business cycle in the long run, finding that volatility plays a primary role in the definition of the businesscycle, which has important consequences for econometricians and forecasters.
Keywords: Business Cycle; Secular Changes; Structural Breaks; Volatility
JEL Codes: C22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in volatility (E32) | Great Moderation (E65) |
| Characteristics of expansion phases (E32) | Reduction in output volatility (E39) |
| Volatility (E32) | Misidentification of business cycle phases (E32) |
| Structural breaks (C22) | Understanding of the GM (D58) |
| End of WWII (N44) | Structural break in volatility (C22) |
| Mid-1980s (E65) | Structural break in volatility (C22) |