It ain't over till it's over: a global perspective on the Great Moderation-Great Recession interconnection

A large-scale model of the global economy is used to investigate the determinants of the Great Moderation and the transition to the Great Recession (1986-2010). Beside the global economy perspective, the model presents the novel feature of a broad range of included financial variables and risk factor measures. The results point to the relevance of various mechanisms related to the global monetary policy stance (Great Deviation), financial institutions' risk taking behavior (Great Leveraging) and global imbalances (savings glut), in shaping aggregate fluctuations. Finally, an out-of-sample forecasting exercise provides evidence against the "end of the Great Moderation" view, showing that the timing, though not the dimension of the Great Recession episode (2008-2010) was predictable on the basis of the same macroeconomic mechanisms at work over the two previous decades.