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  3. American Economic Journal: Macroeconomics
  4. January 2009
  5. On the Sources of the Great Moderation

On the Sources of the Great Moderation

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Abstract

The Great Moderation in the US economy has been accompanied by large changes in the comovements among output, hours, and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. Among other changes, our findings point to an increase in the volatility of hours relative to output, a shrinking contribution of nontechnology shocks to output volatility, and a change in the cyclical response of labor productivity to those shocks. That evidence suggests a more complex picture than that associated with "good luck" explanations of the Great Moderation. (JEL: E23, E24, J22, J24)

Citation

Galí, Jordi, and Luca Gambetti. 2009. "On the Sources of the Great Moderation." American Economic Journal: Macroeconomics, 1 (1): 26-57. DOI: 10.1257/mac.1.1.26

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
  • J22 Time Allocation and Labor Supply
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity

moderate history

  • Posted by CHRISTIAN MUELLER
  • Posted on 2/27/2009 10:36:15 AM
Reading today's revised GDP estimate for the fourth quarter 2008 (annualized -6.2 percent) reminds me of the outstanding analysis by Gali and Gambetti. Thanks to these two authors the sudden drop in the growth rate of GDP does not come as a surprise at all. Quite to the contrary, careful reading of the model shows that the great moderation was sure to end: Equation (2) on page 33 has it that the productivity growth rate follows a random walk with drift, and hence its variance increases over time. Since hours worked per capita is subject to upper and lower absolute bounds (and therefore, its variance is finite), we must conjecture that the volatility of GDP growth also increases with time. This is exactly what I observed today.
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