The Paradox of the “Great Moderation”
In the Financial Development Index and Report, recently published by the World Economic Forum, Nouriel Roubini notes that,
Financial crises are pervasive phenomena both among advanced and emerging market economies. Moreover, in spite of the “great moderation” (a sustained period of high growth and low inflation) of the last two decades, financial crises have become more frequent and more virulent rather than less frequent and less severe. Paradoxically, such great moderation may have triggered asset and credit bubbles. Indeed, with low inflation, sustained growth, and lower nominal and real interest rates, given the loose monetary and credit conditions and the ability of borrowers to lever up again, the possibility of asset bubbles and credit booms has increased.
