The Rise and Fall of the Great Moderation

Abstract

After the harsh debates of the 1970s macroeconomics settled into a new era of relative calm, a period of compromise and splitting the difference. Disagreements didn’t vanish, but they evolved into matters of emphasis and degree. While a few dissident economists rebelled from the sidelines, the new consensus solidified itself in policy advice and the teachings of the most influential textbooks. We will survey the state of macroeconomic thinking during this period in these three realms—theory, policy and teaching. The dissidents too will get a platform, but we will focus on the mainstream of the profession. As we will see, just as a period of somewhat milder economic fluctuations inaugurated the period of compromise, a severe shock, the financial crisis of 2008, has apparently brought it to an end.