Definition
The Great Moderation refers to a period of economic stability in developed countries from the mid-1980s to 2007, characterized by reduced volatility in economic output and inflation. The term is attributed to the stabilization of the business cycle due to structural changes in the economy and improved macroeconomic policies. However, it ended with the 2008 financial crisis.
Phonetic
The phonetics of the keyword “Great Moderation” is /ɡreɪt ˌmɒdəˈreɪʃən/.
Key Takeaways
The Great Moderation, a period of economic stability in the United States from the mid-1980s to late 2000s, is noteworthy for several reasons. Here are three primary takeaways:
- Lower Volatility: This period was characterized by decreased volatility and a significant reduction in the number of severe economic downturns and recessions. Factors such as advancements in financial engineering, economic policy changes, and better inventory management contributed to this stability.
- Consistent Economic Growth: The Great Moderation saw consistent, steady economic growth. Reduced macroeconomic volatility allowed for a comparatively stable and predictable economic environment, making it easier for businesses and consumers to plan for the future.
- End of the Moderation: Despite the period’s name, the Great Moderation did not last indefinitely. The moderation ended with the global financial crisis of 2008, proving that economic stability is not guaranteed. The crisis led to renewed interest in finding ways to prevent such economic downturns in the future.
Importance
The term “Great Moderation” is important in business and finance as it refers to a period of economic stability seen from the mid-1980s to the financial crisis in 2007. During this time, the economies of developed countries, particularly in North America, experienced reduced volatility and steady growth, believed to be due to better economic policies, structural changes, and better business practices. Economists and financial analysts frequently refer to this term to analyze economic trends and formulate future predictions. It’s also crucial when studying the causes and events leading up to the 2008 global financial crisis.
Explanation
The Great Moderation is a term that refers to a period of economic stability in the United States that began in the mid-1980s and lasted until the financial crisis of 2008. During this period, the U.S. economy experienced steady growth and low levels of inflation, which resulted in less volatility in the business cycle. The purpose behind giving this era a specific moniker was to identify and analyze the conditions and policy practices that contributed to this unprecedented period of stability.Understanding the Great Moderation is crucial for policymakers and economists as it aids in the exploration of macroeconomic policies, financial regulations, and the structure of the economy that might help in maintaining stability and avoiding future economic crises. It is a reference point for economists who try to emulate these stable conditions in current economic climates. The lessons learned from this period are used to formulate strategies that could keep inflation low, stabilize output and employment, and make the economy more resilient to shocks.
Examples
The term “Great Moderation” refers to the period from mid-1980s to 2007, where there was a significant reduction in the volatility of business cycle fluctuations in most developed nations, leading to longer economic expansions and shorter, less severe recessions. Here are three real-world examples:1. The U.S. Economy: During the Great Moderation, the United States experienced reduced volatility in gross domestic product (GDP) growth rates and lower rates of inflation. This occurred due to advancements in financial and monetary policy, better inventory management (thanks to advancements in technology), and globalization of financial markets. 2. The U.K. Economy: Similar to the US, the United Kingdom experienced a period of economic stability under the Great Moderation. This was characterized by lower and more balanced inflation rates and reduced volatility in output. Major policy changes, like independent monetary policy set by the Bank of England, contributed to this stability.3. Australian Economy: Australia also experienced a period of the Great Moderation, with more than two decades of economic growth before the global financial crisis of 2008. It had low unemployment and inflation rates during this period. The Reserve Bank of Australia’s successful implementation of monetary policies greatly contributed to this economic stability.
Frequently Asked Questions(FAQ)
What is the term Great Moderation referring to in finance and business?
The Great Moderation refers to the period of reduced economic volatility in the United States that occured from the mid-1980s to the financial crisis in 2007. During this time, there were fewer significant recessions, and the economy experienced stable growth and relatively low inflation.
What led to the Great Moderation?
There’s no known consensus as to what specifically led to the Great Moderation. Some suggest it was due to structural changes in the economy, such as technological advancements, increased financial sophistication, or globalization. Others attribute it to improved monetary policies.
Did the Great Moderation end, and if yes, why?
Many economists agree that the Great Moderation ended with the onset of the global financial crisis in 2007-2008. The crisis led to a major recession, which contradicted the stable economic conditions that marked the Great Moderation.
Was the Great Moderation a global phenomenon?
While the term Great Moderation primarily refers to conditions in the U.S. economy, similar patterns of reduced volatility were observed in other developed countries during the same period.
Can we expect another period similar to the Great Moderation?
It’s difficult to predict future economic patterns with certainty. While some conditions that contributed to the Great Moderation still exist, others, like certain financial regulations and monetary policies, have changed significantly.
How has the Great Moderation affected economic policy?
The Great Moderation led many economists and policymakers to believe that major economic downturns could be a thing of the past. This overconfidence may have influenced decisions leading up to the financial crisis of 2007-2008.
Were there any negative impacts of the Great Moderation?
While the Great Moderation included positive outcomes like economic stability and growth, some believe it also contributed to complacency among regulators and investors, possibly leading to the financial crisis and subsequent recession.
What role did monetary policy play in the Great Moderation?
Many believe improved monetary policy played a major role in the Great Moderation, with central banks better managing inflation and minimizing economic fluctuations. However, others argue that these policies may have inadvertently contributed to financial instability.
Related Finance Terms
- Macroeconomic Stability: This term refers to the state of an economy that experiences consistent growth and low inflation. It’s often considered an indicator of the Great Moderation period.
- Monetary Policy: This is the process by which the monetary authority of a country, like a central bank, controls the supply of money for the purpose of promoting economic growth and stability. It played a key role in the Great Moderation.
- Business Cycle: The cycle of economic expansion and contraction. During the Great Moderation, these cycles were less severe and more predictable.
- Structural Economic Changes: These are long-term, fundamental changes in the economy. Some economists argue that structural changes in the economy contributed to the Great Moderation.
- Financial Innovation: The creation and popularization of new types of financial instruments and services. Financial innovation is often named as one of the factors that led to the Great Moderation.
