The great moderation is the period between the 1980s and 2007 preceded by the great inflation and followed by the great recession of 2008. The time experienced a decreased macroeconomic volatility evidenced by the following aspects. Most central banks could keep inflation low without compromising economic growth. The reduction of inflation created a stable growth by avoiding the boom and bust cycles of the economy. Besides the economy grew because of the absence of uncertainty and greater risk taking resulting to increased trust in the economy of the country. Asset prices like houses and land increased significantly.
The causes of the great moderation are numerous. First, the central banks focused on inflation targeting. In this respect, government policies aimed at keeping inflation low and the banks raised interests before it became an issue. As a result of inflation targeting, monetary policy gained credibility. Moreover, the Federal Reserve was keen on promoting economic growth by cutting interest rates. Besides, there was a significant reduction of the income tax that raised consumer spending.
At the same time, the world was experiencing a global drop in energy prices as oil-producing countries discovered new gas and oil fields. The reduced energy cost helped reduce market volatility. Consequently, the prices of finished goods, and services to stayed low for a prolonged time. Further, during this period, there were tremendous improvements in infrastructure that triggered new investment frontiers and made the prices of goods and services low. A similar effect occurred due to the new technologies such as the internet and advanced computers that kept prices of commodities at avoidable levels as efficiency in production rose (Hakkio).
Works cited
Hakkio, Craig S. "The Great Moderation - A Detailed Essay on an Important Event in the History of the Federal Reserve." Federal Reserve History. 22 Nov. 2013. Web. 27 Apr. 2016. <http://www.federalreservehistory.org/Events/DetailView/65>.
