Isabel Schnabel: Monetary policy and the Great Volatility

Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the "Reassessing Constraints on the Economy and Policy" economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 27 August 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
30 August 2022

The Great Moderation was a period of prosperity and broad macroeconomic stability. The volatility of both inflation and output declined, the length of economic expansions increased, and people in most economies experienced sustained improvements in their standards of living.

There is broad agreement that better monetary policy was an important factor behind the Great Moderation. As central banks took up the fight against spiralling inflation in the late 1970s and early 1980s, they brought down and stabilised inflation expectations at levels that provided a solid nominal anchor for firms and households.

The subsequent advance of inflation targeting around the world is believed to be a prime reason why the global financial crisis of 2008 merely interrupted the Great Moderation. Afterwards, macroeconomic volatility quickly dropped back to its previous low levels.

Yet, monetary policy was not the only factor behind the Great Moderation. Good luck, in the sense of a smaller variance of the shocks hitting the global economy, is widely believed to have played an important role as well. Compared with the 1970s, for example, real oil prices traded in a much narrower range from the second half of the 1980s until the mid-2000s.

The question I would like to discuss this morning is whether the pandemic, and more recently Russia's invasion of Ukraine, will herald a turning point for macroeconomic stability – that is, whether the Great Moderation will give way to a period of "Great Volatility" – or whether these shocks, albeit significant, will ultimately prove temporary, as was the case for the global financial crisis.