Tuesday, January 29, 2008

The Great Moderation

Here's an excellent discussion on the Freakonomics blog on "The Great Moderation," and why the probability of recession in the US may be overstated.

I'm not convinced.... a large housing correction as we are now seeing in the US has always predicted a recession in the past (see this post on the Calculated Risk blog, for example). I don't think the mechanism will be any different this time around.

Yes, the evolution of the economy and improved macroeconomic policy may have resulted in an increased ability of the economy to adjust to a range of different shocks, but that doesn't mean that it can avoid recessions under all circumstances! If the shock is big enough (as the current one appears to be), we'll still get a recession.

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