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. Ben Bernanke

    The chairman of the board of governors of the U.S. Federal Reserve ...
  2. Big Ben

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

    A macroeconomic strategy enacted by governments and central banks ...
  4. Financial Accelerator

    A financial theory that states that a small change in financial ...
  5. Helicopter Drop (Helicopter Money)

    Also known as helicopter money, a helicopter drop is a hypothetical, ...
  6. Credit Easing

    Policy tools used by central banks to make credit more readily ...
Related Articles
  1. Markets

    Ben Bernanke: Background And Philosophy

    Get some insight into the man at the forefront of key U.S economic decisions.
  2. Investing

    Why Does Bernanke Keep Pushing Helicopter Money?

    Perhaps this is to be Bernanke’s post-retirement life, flying all over the world convincing struggling economies to be bolder with their fiscal and monetary policy.
  3. Markets

    Bernanke Says the British Are Brexit's Biggest Losers

    The former Federal Reserve Chairman gives his views on the economic implications of the Brexit vote
  4. ETFs & Mutual Funds

    Citadel And Bernanke, The Perfect Relationship?

    How does Bernanke's relationship with investment firms impact Wall Street and Main Street?
  5. Managing Wealth

    The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
  6. Markets

    Business Cycle

    The business cycle refers to the fluctuations in economic activity that an economy experiences over a period of time. It consists of expansions, or periods of economic growth, and contractions, ...
  7. Markets

    How Automatic Stabilizers Work

    Many economists claim that automatic stabilizers only work in the short term and question their effect on government spending. In truth, automatic stabilizers do not always have enough impact ...
  8. Markets

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  9. Markets

    Macroeconomics

    Macroeconomics studies the performance of an economy as a whole. While microeconomics focuses on the decisions, spending and performance of individuals or single businesses, macroeconomics focuses ...
  10. Markets

    Macroeconomics

    Find out everything you need to know about macroeconomics.
RELATED FAQS
  1. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of, and mathematical principles behind, standard deviation as a measurement of portfolio ... Read Answer >>
  2. How is standard deviation used to determine risk?

    Understand the basics of calculation and interpretation of standard deviation and how it is used to measure risk in the investment ... Read Answer >>
  3. How is risk aversion measured in Modern Portfolio Theory (MPT)?

    Find out how risk aversion is measured in modern portfolio theory (MPT), how it is reflected in the market and how MPT treats ... Read Answer >>
  4. What is standard deviation used for in mutual funds?

    See how standard deviation is helpful in evaluating a mutual fund's performance. Use it in combination with other measurements ... Read Answer >>
  5. What is the difference between standard deviation and average deviation?

    Understand the basics of standard deviation and average deviation, including how each is calculated and why standard deviation ... Read Answer >>
  6. What is the difference between standard deviation and mean?

    Understand the basics of calculating and interpreting mean and standard deviation and how these mathematical fundamentals ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center