Macroeconomic Lessons from The Great Deviation

Each year for the past 25 years the National Bureau of Economic Research has sponsored a conference on macroeconomics with a special emphasis on empirical research with policy relevance. The results are published in the NBER Macroeconomics Annual. Initiated by Martin Feldstein when he was president of the NBER, the conference and the annual volume has had a distinguished group of editors over the years, including Stanley Fischer, Olivier Blanchard, Julio Rotemberg, Ben Bernanke, Daron Acemoglu, Kenneth Rogoff, and Michael Woodford.

This spring I gave the dinner talk at the 25th meeting of the Macro Annual, summarizing the empirical work I have been doing on the financial crisis. I called the lecture, Macroeconomic Lessons from the Great Deviation, and began with the following explanation of the title of the talk:

I know economists use the word “Great” too much, but I think it is quite fitting here. We all know what the Great Moderation was and we have debated what caused it. Many have argued that good policy, especially good monetary policy, played a big role. And we all know what the Great Recession was and that it marked the end of the Great Moderation. You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from the practice of at least the previous two decades, and from the recommendations of most macroeconomic theory and models. My general theme is that the Great Deviation killed the Great Moderation, gave birth to the Great Recession, and left a troublesome legacy for the future.

I then went on to list a dozen policy actions and interventions that I would put under the rubric of the Great Deviation and reviewed each. The full talk is here.