The Great Moderation

DEFINITION of 'The Great Moderation'

The Great Moderation is the name given to the period of decreased macroeconomic volatility experienced in the United States since the 1980s. During this period, the standard deviation of quarterly real GDP declined by half, and the standard deviation of inflation declined by two-thirds, according to figures reported by U.S. Federal Reserve Chairman Ben Bernanke. Increased economic volatility in the late 2000s has led many to question whether this period of economic stability was merely transitory.

BREAKING DOWN 'The Great Moderation'

In a speech delivered in 2004, Ben Bernanke hypothesized three potential causes for this period of economic stability: structural change in the economy, improved economic policies and good luck.





The 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. Bernanke also pointed to improved macroeconomic policies which helped to moderate the large boom and bust cycles of the past. Indeed, many economists point to a gradual stabilizing of the U.S. economy correlated with increasingly sophisticated theories of monetary and fiscal policy. Finally, Bernanke refers 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.

RELATED TERMS
  1. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  2. Big Ben

    An investing slang term referencing Ben Bernanke. The name Big ...
  3. Depression

    A severe and prolonged downturn in economic activity. In economics, ...
  4. Monetarism

    A set of views based on the belief that inflation depends on ...
  5. Great Depression

    An economic recession that began on October 29, 1929, following ...
  6. New Keynesian Economics

    The modern macroeconomic school of thought that evolved from ...
Related Articles
  1. Economics

    Monetarism: Printing Money To Curb Inflation

    Learn how Milton Friedman's monetarist views shaped economic policy after World War II.
  2. Economics

    Why Can't Economists Agree?

    There are many reasons why economists can be given the same data and come up with entirely different conclusions.
  3. Forex Education

    Free Market Maven: Milton Friedman

    As proponent of free market capitalism, this economist changed the way the world's economies operate.
  4. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  5. Economics

    Stagflation, 1970s Style

    Find out how Milton Friedman's monetarist theory helped bring the U.S. out of the economic doldrums.
  6. Active Trading

    Giants Of Finance: John Maynard Keynes

    This rock star of economics advocated government intervention at a time of free-market thinking.
  7. Economics

    What Caused The Great Depression?

    Learn how government actions may have contributed to this major economic downturn.
  8. Economics

    How To Prepare For Rising Interest Rates

    Ignoring interest rates is a mistake because there are many ways to increase your income as they start to rise. The key is to be ready to act.
  9. Economics

    Understanding Conflict Theory

    Karl Marx advanced conflict theory, which claims society is in a state of perpetual conflict due to the competition for limited resources.
  10. Fundamental Analysis

    3 Times the FOMC Got It Right This Century

    Learn about three times that the Federal Open Market Committee (FOMC) and the Federal Reserve took positive steps to help the economy in the 21st century.
RELATED FAQS
  1. How successful have "dove" Federal Reserve heads been in the past when it comes to ...

    Until the financial crisis of 2007-2008, it seemed as though dovish chairs of the Federal Reserve had used monetary policy ... Read Full Answer >>
  2. Which has performed better historically, the stock market or real estate?

    For the majority of U.S. history – or at least as far back as reliable information goes – housing prices have increased only ... Read Full Answer >>
  3. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  4. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  5. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  6. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center