Abstract

The “Great Moderation” referring to the mitigated volatility of output and other aggregate variables, began in the mid-1980s in the United States. In this paper, we discuss the contribution of energy-saving technological progress toward the Great Moderation. The time path of energy-saving technology is estimated following the approach by Hassler, Krusell, and Olovsson (2011) and fed into a standard real business cycle model with energy as a production input. The simulation results show that the impulse response of value added to a 10% energy price shock is mitigated from -0.54% to -0.34% due to energy-saving technological progress. This implies that such progress is partially accountable for the Great Moderation.

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