1. Nick Bloom, Macro Topics, Spring 2007 Nick Bloom Great Moderation

2. Nick Bloom, Macro Topics, Spring 2007 Real output volatility is falling As you saw real output volatility has been falling, with an apparent break-point in the US in mid 1980s Worth noting when look at financial measures: Firm stock returns volatility has risen (Comin & Philippon, 2005) Public firms only, private firm volatility flat (Davis et al. 2007) S&P500 stock index volatility also flat (Bloom, 2006)

3. Nick Bloom, Macro Topics, Spring 2007 Individual public firm stock volatility is rising Source: Comin and Philippon (2005, NBER MA)

4. Nick Bloom, Macro Topics, Spring 2007 Source: Bloom (2007) OPEC II Monetary turning point Black Monday* Gulf War I Asian Crisis Russia & LTCM 9/11 Enron Gulf War II Afghanistan JFK assassinated Cuban missile crisis Cambodia, Kent State OPEC I Franklin National Vietnam build-up S&P stock market volatility if flat

5. Nick Bloom, Macro Topics, Spring 2007 Ben Bernanke “The Great Moderation” Remarks at Eastern Economic Association

6. Nick Bloom, Macro Topics, Spring 2007 Overview Discusses reason for great moderation Starts by noting Stock & Watson (2002) claim the largest component is good luck Argues that good monetary policy may have played a more important role – shifted Taylor curve in

7. Nick Bloom, Macro Topics, Spring 2007 The Taylor curve linking output-inflation volatility C (post 2004)

8. Nick Bloom, Macro Topics, Spring 2007 Bernanke argues Stock & Watson (2002) could erroneously be attributing a shift to “good luck” Better monetary policy may look like less shocks if: Better policy stabilizes expectations (less responsive to shocks), “rational inattention” (Sims, 2003) Reduces the impact of shocks that arise (earlier “shocks” may have actually been induced by bad policy) Changes sensitivity of system to shocks – firms may raise prices less if expect others to But can not be through dynamics (AR coefficients stable)

9. Nick Bloom, Macro Topics, Spring 2007 Olivier Blanchard and John Simon “The Long and Large Decline in US Output Volatility” Brookings Economic Papers, 2001

10. Nick Bloom, Macro Topics, Spring 2007 They argue output volatility has been falling for a long time, with the 1970s an abberation

11. Nick Bloom, Macro Topics, Spring 2007 Decline not just driven by just less recessions

12. Nick Bloom, Macro Topics, Spring 2007 Volatility has fallen in every G7 country except Japan

13. Nick Bloom, Macro Topics, Spring 2007 Finishes with a puzzle of what has happened? Evidence is contradictory with no “smoking-gun” cause Recent by Jaimovich and Siu (2007, Stanford mimeo), argue another big factor is demographics: Show in micro & macro data young & old more volatile Show changing demographics in G7 explains ≈ 1/3 drop Open questions: Why has volatility gone down – getting there but still not resolved What are TFP shocks (especially negative TFP) – can we use volatility to get a better handle Do these models hold in other countries?