Sources of the Great Moderation: A Time-Series Analysis of GDP Subsectors

Abstract Recent work finds evidence that the volatility of the U.S. economy has fallen dramatically since the mid-1980s. We trace the timing of this so-called "Great Moderation" across many subsectors of the economy in order to better understand its root cause. We find that the interest rate sensitive sectors generally experience a much earlier volatility decline than other large sectors of the economy. The changes in financial deregulation and Federal Reserve stabilization policies that occurred during the early 1980s support the view that improved monetary policy may have played an important role in stabilizing real economic activity. JEL classification: C12, C22, E