Abstract

Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private-sector behaviour (such as better inventory management), or more effective financial innovations. This chapter shows that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation-expectations formation within the private sector. One general finding of the authors’ analysis is that seemingly inadequate stabilization policies may, in fact, work. They comment on the broader ramifications for stabilization policy of this finding.