Where will there be variability?

Since the early 1990s, OECD countries have been said to be experiencing the “great moderation”: low variability in growth, inflation and interest rates. The great moderation resulted from the weakening of Phillips curve effects: growth no longer leads to inflation and therefore no longer leads to a reaction by central banks and interest rates. But two economic policy developments have also been made possible by the great moderation: The determination to do what it takes to combat recessions, with highly countercyclical economic policies; The determination to quickly get economies back to full employment. Beyond the highly countercyclical policies, the upshot of these developments is that economic policies remain stimulatory during expansion periods. The low variability of growth, interest rates and inflation will therefore continue (fight against recessions, persistently low interest rates without any effect on inflation), but these policies will give rise to high variability in asset prices (due to growth stimulus in an environment of low interest rates and abundant liquidity and the proliferation of financial crises). The price to pay for the low variability of growth, inflation and interest rates will therefore be high variability in asset prices (share prices, real estate prices, etc.).