The myth of financial innovation and the Great Moderation

Wouter den Haan, Vincent Sterk, 8 November 2011

Financial institutions played a leading role in the global crisis, and policymakers are under pressure to do something about them. This column argues that before any draconian measures are passed, we need to be reminded of the benefits of the financial sector and the innovation it provides.

Many changes have taken place in the financial sector over the last couple of decades. Deregulation was followed by a burst of innovation, a step-up in leverage, an increase in cross-border capital flows, and larger financial institutions.

Topics: Financial markets
Tags: business cycles, financial institutions, great moderation

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Does the Great Recession really mean the end of the Great Moderation?

Olivier Coibion, Yuriy Gorodnichenko, 16 January 2010

Was the Great Moderation “something of a fluke”? This column argues that good monetary policy did play a role in taming inflation. It argues that the current recession, while clearly severe by historical standards, does not seem to imply a return to the levels of volatility observed in the 1970s.

“No one knows for sure what caused the Great Moderation. Some had credited increased sophistication of financial markets and the wisdom of the Federal Reserve Board... Well, folks, it turns out the great moderation was something of a fluke.” – Robert Reich, 15 July 2008