Since the Mid-1980s to 2007 major industrial countries went through the period called by economists, the “Great Moderation”. Researchers illustrate that the variability of quarterly growth in GDP declined by half and the variability of quarterly inflation decreased by two-thirds over the two decades.
Declining variability of inflation empowers the price mechanism, lowers risks and helps policymakers to decide on new policies much easier. Also, reducing volatility of GDP gives stable situation as such firms could make efficient decisions for their own and the economy as a whole. Under such circumstances, industrial economies could react to shocks better than the past. Hence, people in these countries enjoyed a strong and stable economy over three decades. It was a marvelous gift from the Great Moderation.
Ben Bernanke the former chairman of the board of governors of the Federal Reserve System mentions that three classes of explanations could be proposed for this event: structural change, macroeconomic policy and good luck! Then he argues that macroeconomic policy especially monetary policy is the most important cause of less volatility in inflation and GDP.
Standard economic models imply that policymakers can reduce the variability of inflation only by allowing more volatility in GDP. So, the question is “how macroeconomic policy could reduce both GDP and inflation together in the Great Moderation?” The point is under the above-mentioned period, policymakers had more accurate understanding of the economy and of the effect of their policies than the past.
Rouhani’s government could also bring a similar situation to Iran’s economy. Although the current macroeconomic volatility in Iran is higher than developed countries, data show that today it is much less than the former government’s years. How did the government could succeed to mitigate the variability of inflation and GDP? The answer is what Bernanke believes the main cause of the great moderation that is better macroeconomic policy or in other words, policymakers currently have better understanding of the economy. But, what is the core of Rouhani’s macroeconomic policy?
1) Avoiding budget deficit is the pillar of current fiscal policy.
2) The contraction of monetary base is also the key of current monetary policy.
Both result in a kind of moderation with less volatility in inflation and GDP for Iran’s economy.
