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Guest Lecture: Sir Michael Cullen - The Great Moderation and the Great Confusion

Page updated Jul 14, 2016

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Presentation material for Michael Cullen's lecture presented at the Treasury on 7 July 2016.

Abstract

The title of the paper indicates the contrast between the period of the so-called "Great Moderation" (c.1985-2008) and the subsequent period (2008-) which I have called "The Great Confusion". The first period was marked by the strong belief that liberalised labour and capital markets, increasing globalisation, and independently operated, inflation-focussed monetary policy had effectively brought to an end high levels of volatility in developed economies.

The second period has seen that confidence largely collapse. The effects of the Global Financial Crisis have continued to resonate in many economies with a growing uncertainty about the capacity of traditional measures to be effective in such circumstances.

After describing and analysing various aspects of the two periods I conclude that monetary policy remains the most effective tool to deal with the ups and downs of normal business cycles. But longer downturns arising out of financial crises do not respond well to orthodox monetary policy and require a heterogeneous mix of monetary and fiscal approaches. These, particularly the latter, require longer term planning while under any circumstance rigorous countercyclical fiscal policy is crucial to the ability to respond to such crises.

About Michael Cullen

Sir Michael John Cullen is a former New Zealand politician. He served as Deputy Prime Minister of New Zealand, also Minister of Finance, Minister of Tertiary Education, and Attorney-General. He was the deputy leader of the Labour Party from 1996 until November 2008, when he resigned following a defeat in the general election. He resigned from Parliament in April 2009, to become the deputy chairman of New Zealand Post from 1 November 2009 and chairman from 1 November 2010.

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