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.