Would great moderation continue?

I have earlier written a few posts on Great Moderation. The posts have varied on what it means, the research work, conferences etc.

I came across this excellent paperon the subject by William White who revisits the subject and provides a more comprehensive answer on what led to great moderation. Most research looks at either Monetary Policy or structural factors, he says it is a combination of four factors:

(a) More effective domestic monetary policy?
(b) Increased domestic deregulation, competition and productivity?
(c) A global saving glut?
(d) Increased global competition?

Though, he is not convinced that this can continue and infact says as the recent evidence shows, the excesses are bound to correct.

However, a combination of these hypotheses (including a significant role for increased global competition) seems to provide a plausible explanation, not only for continuing low inflation, but also its coexistence with rapid growth and low real interest rates. Unfortunately, the analysis also leads to the conclusion that rising inflation, unwinding financial imbalances, or both, could easily follow the welcome stability seen to date.

Highly recommended reading! What also caught my eye was this:

As will be discussed below, there seems little doubt that the downturn in inflation in many countries owed a great deal to central bank policies. Nevertheless, two puzzles remain. The first one is that the dramatic decline in inflation was shared by a diverse set of economies with different institutional setups, different degrees of economic and financial development, different monetary policies, different degrees of central bank independence and, perhaps above all, different attitudes to exchange rate movements. Indeed, a number of countries had their exchange rates effectively pegged to the dollar, which, assuming the absence of capital controls, would imply that there were significant limits to their capacity to conduct an independent monetary policy at all. Global trends in the face of all this diversity naturally lead one to search for a more unified global explanation.

I had raised this point in an earlier postwhere I said it will be interesting to study the structure of various types of Cental Banking and whether there operations are converging or not.

This paper was presented at Bank of France’s conference. Janet Yellen discussed the paper and emphasised that monetary policy has played a much bigger role in great moderation than the credit given by White to it.