Research published in journals like the American Economic Review, dating back to a 2000 article by Margaret McConnell of the New York Fed and Gabriel Perez-Quiros of the European Central Bank, tells a different story. This line of research says that good Fed policy was necessary but not sufficient, that the business cycle never disappeared, and that most of the Great Moderation emerged not from deliberate government policy but from changes in business practices that occurred for competitive reasons having nothing to do with macroeconomic goals.
In the Summer 2008 issue of the Journal of Economic Perspectives, economists Steven J. Davis and James A. Kahn review this research and further dissect the evidence from both aggregate statistics and individual measurements of things like the lead times for ordering production materials and fluctuations in household spending. What they find fits the broad outlines of Romer’s story—but not its congratulatory conclusion. The Great Moderation looks a lot like the staid 1950s, with better inventory management and more-flexible employment contracts.
...When Davis and Kahn broke down the GDP data by sector, they found that from 1970 on, the size of fluctuations in services didn’t change much. Nondurable goods became only modestly less volatile than they had been before 1980. The dramatic smoothing of the jagged line that appears when you graph all of GDP together mirrors what happened in only a single sector: durable goods. So the Great Moderation wasn’t a general phenomenon. It was something that happened in that one particular part of manufacturing. (The economy’s shift to more services and less durable-goods production did calm things down, but not enough to account for the big change.)
Read the whole thing.