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Business Encyclopedia Entry 1777274890

The Great Moderation refers to a period of significant economic stability and reduced volatility in the United States and other developed economies, which occurred from the early 1980s to the late 2000s. ## Overview The Great Moderation is a term coined by economist Robert Shiller in 2005 to describe a period of remarkable economic stability in the United States and other developed economies. During this time, the business cycle experienced a significant reduction in volatility, characterized by fewer and less severe recessions. This phenomenon was observed in various economic indicators, including inflation, unemployment, and GDP growth rates. The Great Moderation was marked by a decrease in the frequency and severity of economic downturns, leading to a period of sustained economic growth and stability. The Great Moderation was not limited to the United States; it was a global phenomenon, observed in other developed economies such as the United Kingdom, Canada, and Australia. This period of economic stability was attributed to various factors, including improvements in monetary policy, advances in economic theory, and the implementation of more effective financial regulation. The Great Moderation was also characterized by a decline in the volatility of financial markets, as measured by the VIX index, which tracks the implied volatility of the S&P 500 stock index. The Great Moderation was a significant departure from the economic instability of the 1970s and early 1980s, which was marked by high inflation, stagnant economic growth, and frequent recessions. The period of economic stability that followed was a major contributor to the increased prosperity and economic growth experienced by many developed economies during the late 20th and early 21st centuries. ## History/Background The Great Moderation began in the early 1980s, following a period of significant economic instability in the 1970s. The 1970s were marked by high inflation, which peaked at 14.8% in 1980, and frequent recessions, including the 1973-1975 recession and the 1980 recession. The high inflation of the 1970s was largely caused by the 1973 oil embargo and the subsequent price shock, which led to a sharp increase in oil prices. In response to the economic instability of the 1970s, the Federal Reserve, led by Chairman Paul Volcker, implemented a series of monetary policy measures aimed at reducing inflation and stabilizing the economy. These measures included a sharp increase in interest rates, which helped to reduce inflation and stabilize the economy. The success of these measures marked the beginning of the Great Moderation, which was characterized by a sustained period of economic stability and reduced volatility. ## Key Information The Great Moderation was marked by several key features, including: * Reduced volatility: The Great Moderation was characterized by a significant reduction in the volatility of economic indicators, including inflation, unemployment, and GDP growth rates. * Fewer recessions: The Great Moderation was marked by a decline in the frequency and severity of economic downturns, with only two recessions occurring during the period (1990-1991 and 2001). * Improved economic growth: The Great Moderation was characterized by sustained economic growth, with GDP growth rates averaging around 3% per annum. * Decline in inflation: The Great Moderation was marked by a decline in inflation, which averaged around 2% per annum during the period. ## Significance The Great Moderation was a significant phenomenon that had a major impact on the global economy. It marked a period of sustained economic growth and stability, which contributed to increased prosperity and economic growth experienced by many developed economies during the late 20th and early 21st centuries. The Great Moderation also highlighted the importance of effective monetary policy and financial regulation in maintaining economic stability. However, the Great Moderation came to an end in 2007, with the onset of the global financial crisis. The crisis was triggered by a housing market bubble, which burst in 2007, leading to a sharp decline in housing prices and a subsequent credit crisis. The crisis had a major impact on the global economy, leading to a deep recession and widespread economic instability. INFOBOX: - Name: The Great Moderation - Type: Economic phenomenon - Date: 1980s-2007 - Location: Global - Known For: Reduced economic volatility and sustained economic growth TAGS: **Economic stability**, **Monetary policy**, **Financial regulation**, **Global economy**, **Business cycle**, **Inflation**, **Unemployment**, **GDP growth**, **Financial crisis**