Food for Thought: Did the Great Recession Kill the Great Moderation?

For college students, here’s a bit of ancient history.

As recently as early 2008, macroeconomists spent a lot of time talking about the Great Moderation. Then the Great Recession of 2007-9 hit.

What was the Great Moderation?

Well, first let’s review what macroeconomists think about the Great Recession. That’s a cute name, but it wasn’t coined by macroeconomists. But no one really knows when that name was coined: here’s where it gets ridiculous — for a while people have been calling every recession the great recession until it turns out that it didn’t hurt that much. Well, whatever … I think the name has finally stuck to the 2007-9 recession. Second, as emphasized in class, once you treat the data like you actually care about realistically accounting for average growth … the Great Recession of 2007-9 looks comparable to the bad ones we had in 1981-2 and 1973-5.

So, the Great Moderation is the name given to the period from 1982 through 2007 where we had 3 long expansions (2 of them pretty strong ones too), that sandwiched 2 weak and mild recessions. That’s an entire generation where the U.S. macroeconomy was remarkably benevolent to us.

I think if we went outside of macroeconomics, people would say that of course the Great Recession killed the Great Moderation. But for macroeconomists that’s an open question that someone needs to examine.

New research by Gadea, Gomez-Loscos, and Pérez-Quirós checks the U.S. real GDP data for structural breaks — that is, changes in the underlying structural process that’s generating the data. What they look for is 0, 1, or 2 structural breaks: if there’s 0 there never was a Great Moderation, and if there’s 2 there was a Great Moderation but it ended. But what they find is that the data shows just one structural break, in the early 1980’s corresponding to the onset of the Great Moderation.

One hallmark of the Great Moderation was that the last 2 of the 3 expansions started out weak, and stayed weak for quite a long time (2-4 years) before picking up steam.

I’m sure there’s more research to come, but this first shot at the problem suggests that the Great Moderation is ongoing, and as a corollary, that the Obama expansion — which is getting on the long side but which has never been strong — is a continuation of the pattern.