The Importance of Low Aggregate Volatility in the US Economy

Since the mid 1980’s the United States economy has been characterized by low inflation and low volatility in the market. The Former Fed chairman Ben Bernanke has even gone as far to say that the Fed has tamed the business cycle. Supporters of this idea believed that deregulation of the financial sector and controlling inflation would bring long expansions and limited recessions. What were the factors that caused this period of stable economic growth? This period of low volatility was due to both Fed regulation and good timing or luck. The financial crisis has obviously proven that the Fed has not fully tamed the business cycle. â€Å"Whether any rise in volatility is more likely temporary than permanent will depend on the cause of the rise in volatility† (Clark, 5-6). Now the question remains is if The Great Moderation is really over, and if the economy can return to this period of low volatility. Some believe that this rise in volatility is only temporary. Why is low aggregate volatility so important? For starters, the market is more stable and investors’ â€Å"animal spirits† are kept in check. People are more optimistic about employment and economic growth. Low inflation helps keep economic and business forecasting less volatile. â€Å"Lower volatility of inflation improves market functioning, makes economic planning easier, and reduces the resources devoted to hedging inflation risks† (Bernanke, 145). A stable economy is always the goal for the Fed. In order to have a stableShow MoreRelatedIncrease Household Debt Levels At Australia1002 Words   |  5 Pagesyear, (ABS 2014). This significant rise in debt taken on by Australian households can be attributed to favourable macroeconomic conditions and historically low rates of interest and inflation, (Meng, Hoang Siriwardana 2013). 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