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American Economic Journal: Macroeconomics: Vol. 1 No. 1 (January 2009)
AEJ: Macro Volume. 1, Issue 1 | 
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AEJ: Macro Forthcoming Articles
On the Sources of the Great Moderation
Article Citation
Galí, Jordi, and
Luca Gambetti. 2009. "On the Sources of the Great Moderation."
American Economic Journal: Macroeconomics,
1(1): 26-57.
DOI: 10.1257/mac.1.1.26
DOI: 10.1257/mac.1.1.26
Abstract
The Great Moderation in the US economy has been accompanied by
large changes in the comovements among output, hours, and labor
productivity. Those changes are reflected in both conditional and
unconditional second moments as well as in the impulse responses
to identified shocks. Among other changes, our findings point to an
increase in the volatility of hours relative to output, a shrinking contribution
of nontechnology shocks to output volatility, and a change
in the cyclical response of labor productivity to those shocks. That
evidence suggests a more complex picture than that associated with
"good luck" explanations of the Great Moderation. (JEL: E23, E24,
J22, J24)
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Authors
Galí, Jordi (CREI, U Pompeu Fabra)
Gambetti, Luca (U Autonoma de Barcelona)
Gambetti, Luca (U Autonoma de Barcelona)
JEL Classifications
E23: Macroeconomics: Production
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
J22: Time Allocation and Labor Supply
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
J22: Time Allocation and Labor Supply
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
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Posted By: Christian Mueller-Kademann
Date: 2009-02-27 10:36:15
Reading today's revised GDP estimate for the fourth quarter 2008 (annualized -6.2 percent) reminds me of the outstanding analysis by Gali and Gambetti. Thanks to these two authors the sudden drop in the growth rate of GDP does not come as a surprise at all. Quite to the contrary, careful reading of the model shows that the great moderation was sure to end: Equation (2) on page 33 has it that the productivity growth rate follows a random walk with drift, and hence its variance increases over time. Since hours worked per capita is subject to upper and lower absolute bounds (and therefore, its variance is finite), we must conjecture that the volatility of GDP growth also increases with time. This is exactly what I observed today.