TIL: economics has a lot of "great" events.



For those of you that don't know, the Great Moderation was a period from around 1984 to 2007 during which macroeconomic volatility (the business cycle) was practically tamed. There are about three mainstream explanations, and one more heterodox explanation. Since I'm biased, I'll outline all four and then let you choose.

The first is simply luck, which essentially says that any shocks to the economy were simply less severe by chance.

The second is the structure of the economy, which states the nature of the economy (improved technology, shift to service-based employment) was better at absorbing any shocks which did occur.

These two explanations have been largely been discarded, however, and there remains just a single mainstream one which is truly considered viable (by economists) any more. The Taylor Principle, which is that as inflation expectations rose, the Fed raised interest rates more than expectations. For instance, if inflation expectations rise to 1pc above the goal, the Fed would raise the nominal interest rate to >1pc, thus raising the real interest rate. This is essentially how Volcker broke inflation in the 1970s. This works, essentially, by impeding the velocity of money and slowing the creation of money which occurs in the banking system.

The last, less mainstream explanation, is that the Federal Reserve - towards the end of Volcker's tenure and during Greenspan's - was targeting nominal income, which is just the total spending in the economy, or aggregate demand. The idea is that with nominal income stabilised, demand shocks (where nominal income/total spending falls sharply) didn't occur and thus recessions (like that in 1991) were a lot milder. This seems to be supported by this quote by Greenspan: "I’m basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that."

So, based on those explanations, which do you think?

Tech boom would seem the most likely contributor, I would think.
More jobs and more people spending money.