The phrase “Great Moderation” conjures images of calm waters in the economic seas—a sharp contrast to the booms and busts that defined much of the 20th century. But what exactly was the Great Moderation, and does its legacy hold any value for Australians navigating today’s unpredictable financial landscape?
What Was the Great Moderation?
The Great Moderation refers to a period from the mid-1980s through the mid-2000s, where advanced economies experienced reduced volatility in economic growth, inflation, and employment. First coined by economists after observing these trends in the US, the term has since been used to describe similar experiences in Australia, the UK, and much of the developed world.
- Steady GDP growth with fewer recessions
- Low and stable inflation following the high rates of the 1970s and early 1980s
- More predictable monetary policy as central banks adopted inflation targeting
Australia’s own economic journey mirrored this: after the painful recession of the early 1990s, the country enjoyed nearly three decades of uninterrupted growth, with inflation rarely straying outside the Reserve Bank of Australia’s (RBA) 2–3% target band.
Why Did the Great Moderation Happen?
Economists continue to debate the precise causes, but three key factors are widely credited:
- Improved monetary policy: Central banks like the RBA and US Federal Reserve embraced inflation targeting and clearer communication, reducing uncertainty and keeping inflation expectations in check.
- Structural reforms: Deregulation, flexible labour markets, and advances in technology made economies more resilient to shocks. In Australia, the floating of the dollar and microeconomic reforms of the 1980s and 1990s played a major role.
- Good luck (benign global conditions): The world enjoyed relatively stable commodity prices, steady global demand, and fewer major geopolitical disruptions.
For Australians, the results were tangible: sustained job growth, rising living standards, and the sense that economic crises were, if not a thing of the past, at least less likely to disrupt daily life.
The End of the Great Moderation—and What Comes Next
The Global Financial Crisis (GFC) of 2007–2008 marked a sudden end to the Great Moderation, exposing vulnerabilities in financial systems worldwide. While Australia dodged recession thanks to mining exports and decisive government stimulus, the idea of a permanently stable economy was shattered.
Fast forward to 2025, and the economic landscape is even more complex. Australians face new challenges:
- Persistent inflation: Following pandemic disruptions and geopolitical shocks, inflation has remained sticky, leading the RBA to adjust its approach to rate hikes and forward guidance.
- Global uncertainty: Trade tensions, supply chain realignments, and climate risks have made economic forecasting harder than ever.
- Policy recalibration: The RBA is reviewing its inflation targeting framework, and the federal government is weighing up fiscal discipline with the need for ongoing support in key sectors like housing and renewables.
Yet, the legacy of the Great Moderation remains relevant. The focus on transparent, rules-based policy and structural adaptability helped Australia weather storms—and could do so again as the country faces the next wave of economic headwinds.
Lessons for Australia in 2025
So, what can policymakers, business owners, and households take from the era of the Great Moderation?
- Stable policy frameworks matter: Clear communication and consistent targets, particularly around inflation and employment, can anchor expectations and reduce volatility.
- Flexibility is key: The reforms of the 1980s and 1990s made Australia more adaptable. Similar innovation is needed now in areas like digital infrastructure and green energy.
- Don’t take stability for granted: The GFC, pandemic, and recent inflation spikes prove that shocks will come—resilience requires ongoing vigilance.
As 2025 unfolds, Australia has the opportunity to blend the hard-won lessons of the Great Moderation with new thinking. The goal isn’t to chase perfect calm, but to build an economy that can weather the inevitable storms ahead.
