THE SOURCES OF THE GREAT MODERATION: A SURVEY
Bruno Ćorić 1 (University of Split, Faculty of Economics)
April 2011
ABSTRACT
The decades preceding the outbreak of the financial crisis in August of 2007 were a period of
exceptional stability for the US economy. A number of studies over the past decade proposed
different theoretical rationales and underpinning empirical evidence to explain the so-called
Great Moderation. These explanations can be categorized in three main groups: good luck;
good policy; and good practice. This study reviews and evaluates the growing literature on the
sources of the Great Moderation. We find that substantial debate still surrounds the
underlining causes of reduction in output volatility, and suggests new aspects to expand the
existing studies.
Key words: GDP growth volatility, structural changes, the Great Moderation
JEL Classification: E32
Number of words: 10,899
Address for correspondence: Bruno Ćorić, University of Split, Faculty of Economics,
Matice Hrvatske 31, 21000 Split, Croatia. (e-mail: bcoric@efst.hr). This paper is based on the
second chapter of Bruno Ćorić’s PhD dissertation at Staffordshire University. I thank Geoff
Pugh, Bill Russell, Nick Adnett, Peter Reynolds and Ahmad Seyf for their helpful
suggestions. Remaining errors are the responsibility of the author.
1
1
Electronic copy available at: http://ssrn.com/abstract=1641201
I. INTRODUCTION
The analysis of the short-run output volatility occupies a prominent place in macroeconomic
research. This analysis has been driven by theoretical concerns about the causes of short-run
output volatility and by an important policy question, how to manage and reduce this
volatility.
The decades preceding the recent crisis had been a period of unprecedented stability for
the US economy. In particular, Kim and Nelson (1999) and McConnell and Perez-Quiros’s
(2000) analysis of the US quarterly GDP growth rates in the period after World War II
revealed a large decline in the...
