Nick Bloom, Macro Topics, Spring 2007 Nick Bloom Great Moderation.
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Nick Bloom, Macro Topics, Spring 2007
Nick Bloom
Great Moderation
Nick Bloom, Macro Topics, Spring 2007
Real output volatility is falling
As you saw real output volatility has been falling, with an apparent break-point in the US in mid 1980s
Worth noting when look at financial measures:
• Firm stock returns volatility has risen (Comin & Philippon, 2005)
•Public firms only, private firm volatility flat (Davis et al. 2007)
• S&P500 stock index volatility also flat (Bloom, 2006)
Nick Bloom, Macro Topics, Spring 2007
Individual public firm stock volatility is rising
Source: Comin and Philippon (2005, NBER MA)
Nick Bloom, Macro Topics, Spring 2007
010
20
30
40
50
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Year
Source: Bloom (2007)
OPEC II
Monetary turning point
Black Monday*
Gulf War I
Asian Crisis
Russia & LTCM
9/11Enron
Gulf War II
Afghanistan
JFK assassinated
Cuban missile
crisis
Cambodia,Kent State
OPEC I
Franklin National
Vietnam build-up
S&P stock market volatility if flat
Nick Bloom, Macro Topics, Spring 2007
Ben Bernanke
“The Great Moderation”
Remarks at Eastern Economic Association
Nick Bloom, Macro Topics, Spring 2007
Overview
Discusses reason for great moderation
Starts by noting Stock & Watson (2002) claim the largest component is good luck
Argues that good monetary policy may have played a more important role – shifted Taylor curve in
Nick Bloom, Macro Topics, Spring 2007
The Taylor curve linking output-inflation volatility
C(post 2004)
Nick Bloom, Macro Topics, Spring 2007
Bernanke argues Stock & Watson (2002) could erroneously be attributing a shift to “good luck”
Better monetary policy may look like less shocks if:
• Better policy stabilizes expectations (less responsive to shocks), “rational inattention” (Sims, 2003)
• Reduces the impact of shocks that arise (earlier “shocks” may have actually been induced by bad policy)
• Changes sensitivity of system to shocks – firms may raise prices less if expect others to
•But can not be through dynamics (AR coefficients stable)
Nick Bloom, Macro Topics, Spring 2007
Olivier Blanchard and John Simon
“The Long and Large Decline in US Output Volatility”
Brookings Economic Papers, 2001
Nick Bloom, Macro Topics, Spring 2007
They argue output volatility has been falling for a long time, with the 1970s an abberation
Nick Bloom, Macro Topics, Spring 2007
Decline not just driven by just less recessions
Nick Bloom, Macro Topics, Spring 2007
Volatility has fallen in every G7 country except Japan
Nick Bloom, Macro Topics, Spring 2007
Finishes with a puzzle of what has happened?
Evidence is contradictory with no “smoking-gun” cause
Recent by Jaimovich and Siu (2007, Stanford mimeo), argue another big factor is demographics:
•Show in micro & macro data young & old more volatile•Show changing demographics in G7 explains ≈ 1/3 drop
Open questions:•Why has volatility gone down – getting there but still not
resolved•What are TFP shocks (especially negative TFP) – can we
use volatility to get a better handle•Do these models hold in other countries?
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