Nick Bloom, Macro Topics, Spring 2007

Nick Bloom

Great Moderation

Nick Bloom, Macro Topics, Spring 2007

Real output volatility is falling

As you saw real output volatility has been falling, with an apparent break-point in the US in mid 1980s

Worth noting when look at financial measures:

• Firm stock returns volatility has risen (Comin & Philippon, 2005)

•Public firms only, private firm volatility flat (Davis et al. 2007)

• S&P500 stock index volatility also flat (Bloom, 2006)

Nick Bloom, Macro Topics, Spring 2007

Individual public firm stock volatility is rising

Source: Comin and Philippon (2005, NBER MA)

Nick Bloom, Macro Topics, Spring 2007

010

20

30

40

50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Year

Source: Bloom (2007)

OPEC II

Monetary turning point

Black Monday*

Gulf War I

Asian Crisis

Russia & LTCM

9/11Enron

Gulf War II

Afghanistan

JFK assassinated

Cuban missile

crisis

Cambodia,Kent State

OPEC I

Franklin National

Vietnam build-up

S&P stock market volatility if flat

Nick Bloom, Macro Topics, Spring 2007

Ben Bernanke

“The Great Moderation”

Remarks at Eastern Economic Association

Nick Bloom, Macro Topics, Spring 2007

Overview

Discusses reason for great moderation

Starts by noting Stock & Watson (2002) claim the largest component is good luck

Argues that good monetary policy may have played a more important role – shifted Taylor curve in

Nick Bloom, Macro Topics, Spring 2007

The Taylor curve linking output-inflation volatility

C(post 2004)

Nick Bloom, Macro Topics, Spring 2007

Bernanke argues Stock & Watson (2002) could erroneously be attributing a shift to “good luck”

Better monetary policy may look like less shocks if:

• Better policy stabilizes expectations (less responsive to shocks), “rational inattention” (Sims, 2003)

• Reduces the impact of shocks that arise (earlier “shocks” may have actually been induced by bad policy)

• Changes sensitivity of system to shocks – firms may raise prices less if expect others to

•But can not be through dynamics (AR coefficients stable)

Nick Bloom, Macro Topics, Spring 2007

Olivier Blanchard and John Simon

“The Long and Large Decline in US Output Volatility”

Brookings Economic Papers, 2001

Nick Bloom, Macro Topics, Spring 2007

They argue output volatility has been falling for a long time, with the 1970s an abberation

Nick Bloom, Macro Topics, Spring 2007

Decline not just driven by just less recessions

Nick Bloom, Macro Topics, Spring 2007

Volatility has fallen in every G7 country except Japan

Nick Bloom, Macro Topics, Spring 2007

Finishes with a puzzle of what has happened?

Evidence is contradictory with no “smoking-gun” cause

Recent by Jaimovich and Siu (2007, Stanford mimeo), argue another big factor is demographics:

•Show in micro & macro data young & old more volatile•Show changing demographics in G7 explains ≈ 1/3 drop

Open questions:•Why has volatility gone down – getting there but still not

resolved•What are TFP shocks (especially negative TFP) – can we

use volatility to get a better handle•Do these models hold in other countries?