What's so great about the Great Moderation?

This paper examines how volatilities of output growth and inflation have changed over a long period for eight countries. We obtain a number of robust empirical results based on a variety of different econometric methods. The lowest volatility occurs during or shortly after the Great Moderation period. Volatility is reduced during that time for most of the countries; however, these reductions in volatility pale in comparison with stability gains achieved during two other periods. One of those periods is the Postwar Moderation, which began near the end of World War II for each country. Not only is the decline in volatility impressive, but also the volatility is typically at the lowest level up to that point in a sample or at least has fallen to a low not seen for decades. And those reductions in volatility are statistically significant, in contrast to the Great Moderation. A second fall in volatility that in nearly all cases exceeds that of the Great Moderation is for inflation during the 1920s. And this moderation in inflation during the 1920s is statistically significant in almost every case. Overall, these and a number of other notable changes in volatility are remarkably robust across countries, different data sources, and alternative econometric methodologies. For example, implementation of a broad-based fixed exchange rate system is typically associated with a substantial reduction in macroeconomic volatility. Another finding, obtained from structural vector autoregression models, is that the changes in volatility for each variable are primarily driven by a fundamentally different type of disturbance.