The Great Moderation and the Great Recession - Macroeconomic Volatility in the United States, the United Kingdom, and Sweden

Sammanfattning: During the Great Recession between 2007 and 2009, the economies of the United States, the United Kingdom, and Sweden experienced increased levels of macroeconomic volatility. This same volatility had undergone a marked decrease in the United States and the United Kingdom beginning in the 1980s - a phenomenon known as the Great Moderation. In this thesis, we investigate (i) whether Sweden has also experienced a Great Moderation, (ii) whether the Great Recession marks the end of the Great Moderation in the three countries, and (iii) what the causes of increased volatility during the Great Recession are. First, we employ a series of break tests to identify structural changes in macroeconomic time series. To analyze the causes of increased variability, we calculate instantaneous standard deviations and employ a TVP-VAR with stochastic volatility to estimate a macroeconomic model. We find clear evidence of a Great Moderation in Sweden, demonstrated by lower volatility of output, consumption, and inflation. Furthermore, we show that the Great Moderation in all three countries is intact, with the Great Recession only representing a transitory period of increased volatility. Finally, our results suggest that this increase in volatility was largely caused by shocks in the financial systems.