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The “Great Moderation” in the United Kingdom
Author(s) -
BENATI LUCA
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00106.x
Subject(s) - economics , great moderation , gdp deflator , counterfactual thinking , real gross domestic product , monetary economics , monetary policy , inflation (cosmology) , luck , volatility (finance) , inflation targeting , econometrics , macroeconomics , philosophy , physics , theology , epistemology , theoretical physics
We use a Bayesian time‐varying parameters structural VAR with stochastic volatility for GDP deflator inflation, real GDP growth, a 3‐month nominal rate, and the rate of growth of M4 to investigate the underlying causes of the Great Moderation in the United Kingdom. Our evidence points toward a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades. Results from counterfactual simulations, in particular, show that (i) “bringing the Monetary Policy Committee back in time” would only have had a limited impact on the Great Inflation episode, at the cost of lower output growth; (ii) imposing the 1970s monetary rule over the entire sample period would have made almost no difference in terms of inflation and output growth outcomes; and (iii) the Great Inflation was due, to a dominant extent, to large demand non‐policy shocks, and to a lesser extent—especially in 1973 and 1979—to supply shocks.