Description

The persistent decline in macroeconomic volatility, known as the “Great Moderation,” is the result of both structural changes in the economy and better monetary policymaking. Structural changes include a smoothing of the components of output, the increased sophistication of financial markets, and innovations in information technology. Related to macroeconomic policymaking, better monetary policy, specifically an anchoring of inflation expectations and an understanding of past mistakes, has contributed to the decline in volatility. Together both structural changes and innovations in policymaking have significantly changed the U.S. economic landscape. This paper will examine the roles of structural changes in the economy and monetary policymaking with regard to the recent reduction in business cycle volatility.