Newswise — LAWRENCE — Economists generally term the mid-1980s up to 2007 the "Great Moderation" as the reduction in economic volatility, possibly due to greater independence of central banks and other factors, was believed to have lasted longer than any prior period.
However, a new study led by a University of Kansas economist that examined data in eight countries going back to the 1800s found that reductions in volatility were actually greater in two other periods — post World War II and the 1920s.
"Something about policy was different in these periods. Policymakers stabilized currency valuations," said John Keating, associate professor of economics. "They also sought to keep the growth rate of the economy on a sustainable path without causing rampant rises in inflation. The idea was to aim for the fastest growth without causing inflation."
The study by Keating and Victor Valcarcel, associate professor of economics as the University of Texas at Dallas, published recently in the Journal of Macroeconomics differs because past studies mostly focused solely on the United States and considered only post-World War II economic data. The researchers also examined economic data of the United Kingdom, Sweden, Italy, Finland, Denmark, Canada and Australia.
The findings point to a greater emphasis on economic stabilization policies, the researchers said, instead of a popular view that the post-war years acted as a "return to normalcy."
Keating said the Bretton Woods meetings in July of 1944 established a worldwide system of fixed exchange rates. This was designed to stabilize economic fluctuations. In the United States two years later, Congress passed the Employment Act of 1946, and soon after the nation saw its volatilities of output growth and inflation fall rapidly.
Not every country also experienced a Great Moderation in the mid-1980s either, so the study could lead to thinking about that period in a new and more global light. Sweden's and Finland's economies faced high volatilities through the mid-1990s with the Scandinavian financial crisis, for example.
Having a better understanding of the fundamental causes of fluctuations in economic volatility can be vital for policymakers in understanding how to best craft effective economic policies, Keating said.
Policymakers and central banks today are determining how to establish and maintain more robust growth after the Great Recession.
"We haven't seen wages going up rapidly, so costs and prices haven't gone up rapidly yet," Keating said. "A question is how are policymakers, central banks in particular, going to handle the economy taking off again along with the inflation rate kicking up. There are signs that more inflation may be coming, but so far the rise in prices has been gradual, even though the unemployment rate is at a low level that in the past would have been associated with a rapid increase in the rate of inflation."