The world economy has experienced wide-spread and vigorous economic growth for several years. Business cycles in major world regions seem to have become less pronounced and longer lasting, implying less volatile output growth. Inflation has also fallen significantly, both regarding its first and second moments. This Great Moderation is likely to reflect the influence of several forces at work. Among the latter are better institutions, stronger political and policy consensus on the benefits of macroeconomic stability; stronger, more accountable, and more sophisticated macroeconomic regimes and policies; structural improvements; and good luck. Domestic improvements in the choice and implementation of macroeconomic regimes and policies are prime candidates to have contributed the most to the Great Moderation.
Author(s): Klaus Schmidt-Hebbel