How beneficial was the Great Moderation after all?

This paper computes the welfare effect of the Great Moderation, using a representative-agent consumption-based asset pricing model. The Great Moderation is modeled according to the data properties of consumption and dividend growth rates, which display a reduction of their innovation-volatility and increased persistence: the latter is a characteristic that has been largely unaddressed in the literature. The theoretical model (a long-run risk model) is calibrated to match average asset pricing variables, as well as consumption and dividend dynamics before and during the Great Moderation. The model captures the relevant features of the Great Moderation (decreased variance, increased persistence, asset prices). It predicts only a modest welfare gain from Great Moderation (0.38 percent in consumption equivalent), due mainly to the utility cost of a late uncertainty resolution.