Noisy information, interest rate shocks and the Great Moderation

► We study less activist monetary policy as an explanation for the Great Moderation. ► In the simulated model, the central bank observes a noisy signal of the output gap. ► Less pronounced reaction to the output gap reduces business cycle volatility. ► Less activist policy can account for up to 50% of the Great Moderation. ► The size of the effect depends on the specification of the interest rate rule.