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The “Great Moderation” in the United Kingdom

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  • LUCA BENATI

Abstract

We use a Bayesian time‐varying parameters structural VAR with stochastic volatility for GDP deflator inflation, real GDP growth, a 3‐month nominal rate, and the rate of growth of M4 to investigate the underlying causes of the Great Moderation in the United Kingdom. Our evidence points toward a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades. Results from counterfactual simulations, in particular, show that (i) “bringing the Monetary Policy Committee back in time” would only have had a limited impact on the Great Inflation episode, at the cost of lower output growth; (ii) imposing the 1970s monetary rule over the entire sample period would have made almost no difference in terms of inflation and output growth outcomes; and (iii) the Great Inflation was due, to a dominant extent, to large demand non‐policy shocks, and to a lesser extent—especially in 1973 and 1979—to supply shocks.

Suggested Citation

  • Luca Benati, 2008. "The “Great Moderation” in the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 121-147, February.
    • Handle: RePEc:wly:jmoncb:v:40:y:2008:i:1:p:121-147
    DOI: 10.1111/j.1538-4616.2008.00106.x
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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