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

A large-scale Factor-Augmented Vector Autoregressive (FAVAR) 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 various mechanisms related to the global monetary policy stance (Great Deviation), financial institutions' risk-taking behaviour (Great Leveraging) and global imbalances (savings glut), determining 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.