From Great Moderation to Great Stagflation | Nouriel Roubini

NEW YORK – The world economy is undergoing a radical regime shift. The decades-long Great Moderation is over.

Coming after the stagflation (high inflation and severe recessions) of the 1970s and early 1980s, the Great Moderation was characterized by low inflation in advanced economies; relatively stable and robust economic growth, with short and shallow recessions; low and falling bond yields (and thus positive returns on bonds), owing to the secular fall in inflation; and sharply rising values of risky assets such as U.S. and global equities.

This extended period of low inflation is usually explained by central banks’ move to credible inflation-targeting policies after the loose monetary policies of the 1970s, and governments’ adherence to relatively conservative fiscal policies (with meaningful stimulus coming only during recessions). But, more important than demand-side policies were the many positive supply shocks, which increased potential growth and reduced production costs, thus keeping inflation in check.

During the post-Cold War era of hyper-globalization, China, Russia, and other emerging-market economies became more integrated in the world economy, supplying it with low-cost goods, services, energy, and commodities. Large-scale migration from the Global South to the North kept a lid on wages in advanced economies, technological innovations reduced the costs of producing many goods and services, and relative geopolitical stability allowed for an efficient allocation of production to the least-costly locations without worries about investment security.

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