Great Moderation

The Great Moderation is a term used to describe the period of economic stability and low inflation that the United States and other developed countries experienced from the mid-1980s to the mid-2000s. During this time, economic growth was relatively strong, unemployment was low, and inflation was kept under control.

There are a number of factors that are thought to have contributed to the Great Moderation. These include:

• Changes in monetary policy. In the early 1980s, the Federal Reserve adopted a new monetary policy regime, known as "inflation targeting." This regime focused on keeping inflation low and stable, and it is believed to have helped to reduce uncertainty and volatility in financial markets.
• Financial deregulation. In the 1980s and 1990s, there was a significant amount of deregulation in the financial industry. This deregulation is believed to have contributed to the growth of new financial products and markets, which may have helped to increase financial stability.
• Increased globalization. During the Great Moderation, there was a significant increase in globalization, as trade and investment flows between countries grew rapidly. This increased globalization is believed to have helped to spread economic growth and stability around the world.

The Great Moderation came to an end in the mid-2000s, when the United States and other developed countries experienced a financial crisis. The crisis was caused by a number of factors, including:

• Lax lending standards. In the years leading up to the crisis, banks and other lenders made loans to borrowers who were at high-risk of default. This lending was made possible by a number of factors, including low interest rates and a lack of regulation.
• The subprime mortgage market. A significant portion of the lending that took place in the years leading up to the crisis was in the subprime mortgage market. Subprime mortgages are loans made to borrowers with poor credit histories and low credit scores. These loans are often characterized by high interest rates and fees.
• The housing bubble. The subprime mortgage market was a major factor in the housing bubble that developed in the United States in the early 2000s. The housing bubble was a period of rapid growth in housing prices, which was fueled by speculation and low interest rates.

The financial crisis of the mid-2000s had a significant impact on the United States and other developed countries. The crisis led to a number of changes in economic policy, including:

• Increased regulation of the financial industry. In the wake of the crisis, there has been a significant increase in regulation of the financial industry. This regulation is designed to prevent a similar crisis from happening again.
• Lower interest rates. In the aftermath of the crisis, the Federal Reserve has kept interest rates low in an effort to stimulate economic growth.
• Increased government spending. The government has also increased spending in an effort to stimulate economic growth.

The Great Moderation was a period of economic stability and low inflation that the United States and other developed countries experienced from the mid-1980s to the mid-2000s. The crisis of the mid-2000s led to a number of changes in economic policy, and it remains to be seen whether the Great Moderation will be repeated.