A “Great Moderation” can be pernicious.

The “original” Great Moderation was characterized by:

  1. Low volatilities of real and nominal growth in output
  2. Low and stable inflation

What is forgotten is the Level path along which real and nominal output growth were stable.

With the final release of second quarter GDP, revised up from 4.2% to 4.6% we have to stomach comments such as these:

(WSJ): The U.S. economy grew in the spring at the fastest pace since late 2011, another sign the recovery is accelerating after five years of sluggishness.


(Bloomberg): “We definitely see momentum,” in the U.S. economy, said Brittany Baumann, an economist at Credit Agricole CIB in New York, which correctly forecast GDP.

Those are very misleading comments as the following charts attest. After the initial bounce back in the early stages of recovery, the economy has entered a period of almost unbelievable stability in nominal and real spending. Annualized rates are notoriously volatile and shouldn´t be the basis for comments such as those above.

Pernicious GM

Unfortunately the LEVEL path is too low!

But this accomplishment tells us something interesting: If the Fed was able in 1987-2007 to keep the economy piggy-backing along a level path and now it is keeping the economy piggy-backing along a much lower level path, it could, if it chose to, establish a higher level path along which the economy would ride.

If it is not even trying to do so, either it is woefully ignorant of its powers or it sees no alternative to keeping the economy in a depressed state, bowing to the “Great Stagnation” view!

5 thoughts on “A “Great Moderation” can be pernicious.

  1. Obviously, the Fed is satisfied with 2 percent real growth, as long it can come in at 1.5 percent inflation on the PCE.

    So I now have my plan to save the United States. Control over the PCE.

    We employ agents and monkey with BEA computer software to contrive that the PCE, as reported, comes in near 0.4 percent inflation. The Fed will then ease up a bit, and we can have a real recovery.

    As the PCE or CPI are only subjective indexes….

    • Travis, As I call it in my latest post, it´s “ersatz” nominal stability. They have the wrong level of activity. Therefore inflation “too low” and unemployment “too high”.

      • Fair enough.

        But given how stable the economy has performed for years, we shouldn’t expect inflation expectations to continue falling off a cliff, right?

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