The “Great Moderation” in the United Kingdom


  • I wish to thank the editor of the Journal of Money, Credit, and Banking, Masao Ogaki, two anonimous referees, Charlie Bean, Fabio Canova, Marco Del Negro, Luca Gambetti, Charles Goodhart, Alexander Jung, Haroon Mumtaz, Gert Peersman, Harald Uhlig, Giorgio Primiceri, and Paolo Surico for helpful discussions. Special thanks to the governor of the Bank of England, Mervyn King, for most insightful comments, which led to significant improvements. Usual disclaimers apply. The views expressed in this paper are those of the author, and do not necessarily reflect those of the European Central Bank.


We use a Bayesian time-varying parameters structural VAR with stochastic volatility for GDP deflator inflation, real GDP growth, a 3-month nominal rate, and the rate of growth of M4 to investigate the underlying causes of the Great Moderation in the United Kingdom. Our evidence points toward a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades. Results from counterfactual simulations, in particular, show that (i) “bringing the Monetary Policy Committee back in time” would only have had a limited impact on the Great Inflation episode, at the cost of lower output growth; (ii) imposing the 1970s monetary rule over the entire sample period would have made almost no difference in terms of inflation and output growth outcomes; and (iii) the Great Inflation was due, to a dominant extent, to large demand non-policy shocks, and to a lesser extent—especially in 1973 and 1979—to supply shocks.