Bernanke and "The Great Moderation" in Hindsight
By Bryan Caplan
I just read Bernanke’s 2004 piece on “The Great Moderation.” It’s written by the wise Bernanke I remember, not the embarassment he’s become. In hindsight it’s tempting to treat Bernanke’s analysis as pure delusion. But in the end, I bet a lot of it will hold up, especially since he was careful to highlight his uncertainties. When the dust settles, it still seems plausible that output and inflation volatility will still on average be lower for the post-1984 era than it was for 1960-83. Remember that so far the decline in financial markets far exceeds the decline in the real economy.
Still, there’s plenty in this piece that Bernanke might want to re-write. First and foremost:
Why has macroeconomic volatility declined? Three types of explanations
have been suggested for this dramatic change; for brevity, I will refer
to these classes of explanations as structural change, improved macroeconomic policies, and good luck.
…In particular, I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck, as some have argued, though I am sure good luck had its part to play as well.
In retrospect, luck looms large, no?
Oh, and don’t forget the “Those who forget the past are condemned to repeat it,” department:
Nevertheless, a number of economists have argued that monetary policy
during the late 1960s and the 1970s was unusually prone to creating
volatility, relative to both earlier and later periods (DeLong, 1997;
Mayer, 1998; Romer and Romer, 2002). Economic historians have suggested
that the relative inefficiency of policy during this period arose
because monetary policymakers labored under some important
misconceptions about policy and the economy.
I fear we’ll be paying for Bernanke’s under-estimation of the long-run dangers of bail-outs and massive intervention for decades to come. What happened to you, Ben?