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Business cycle moderation - good policies or good luck: evidence and explanations for the Euro area

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posted on 2006-12-06, 14:46 authored by M.S. Rafiq
Economic fluctuations in most of the industrialised world have for over the past 30 years been characterised by declining volatility. This decline has also been a trait witnessed for output fluctuations in the Euro Area. This paper has two objectives. The first is to provide a comprehensive characterisation of the decline in volatility using a large number of Euro area economic time series and a variety of methods designed to describe the time-varying time series processes. The second objective is to provide new evidence on the quantitative importance of various explanations for this ‘great moderation’. This paper focuses on the central elements in the literature contending why real output growth has stabilised. Such factors include shifts in the structure of the economy, improved policies, and a ‘good luck’ factor. Further, this paper goes on to investigate whether cross-country linkages in growth have shifted, perhaps in a way that can help rationalise the stabilisation in output. Taken together, the moderation in volatility is attributable to a combination of improved policy (around 5 - 30 percent) and identifiable forms of good luck that manifest themselves as smaller reduced-form forecast errors (40 percent).

History

School

  • Business and Economics

Department

  • Economics

Pages

787647 bytes

Publisher

© Loughborough University

Publication date

2006

Notes

This is a working paper. It is also available at: http://ideas.repec.org/p/lbo/lbowps/2006_21.html.

ISSN

1750-4171

Language

  • en

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