What Caused The Great Moderation? Some Cross-Country Evidence

Over the last 20 years or so, the volatility of aggregate economic activity has fallen dramatically in most of the industrialized world. The timing and nature of the decline vary across countries, but the phenomenon has been so widespread and persistent that it has earned the label: “the Great Moderation.” A growing body of research has focused on The Great Moderation and its possible explanations, especially as it applies to the U.S. experience. The literature documents the international dimension of this volatility reduction, but so far little is known about the possible causes from a cross-country perspective. This article shows why The Great Moderation has indeed been a common feature of much of the industrialized world. Specifically, the article focuses on the reduction in the volatility of GDP growth that occurred in the G-7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) and Australia. Similarities among these countries suggest there may be one or more underlying global causes. Still, differences in the experiences of these countries indicate the important influence of country-specific factors.