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The Great Moderation and The Relationship between Output Growth and Its Volatility

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Author Info
Wen-Shwo Fang () (Department of Economics, Feng Chia University, 100 Wen-Hwa Road, Taichung, Taiwan)
Stephen M. Miller () (College of Business, University of Nevada–Las Vegas, 4505 Maryland Parkway, Las Vegas, NV 89154-6005, USA)

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Abstract

This study examines the effect of the Great Moderation on the relationship between U.S. output growth and its volatility over the period 1947 to 2006. First, we consider the possible effects of structural changes in the volatility process. We employ generalized autoregressive conditional heteroscedasticity in mean (GARCH-M) specifications, which describe output growth rate and its volatility with and without a one-time structural break in volatility. Second, our data analyses and empirical results suggest no significant relationship between the output growth rate and its volatility; this favors the traditional wisdom of dichotomy in macroeconomics. Moreover, the evidence shows that the time-varying variance falls sharply or even disappears once we incorporate a one-time structural break in the unconditional variance of output starting in 1982 or 1984. That is, the integrated GARCH effect proves spurious. Finally, a joint test of a trend change and a one-time shift in the volatility process finds that the one-time shift dominates.

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Publisher Info
Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 74 (2008)
Issue (Month): 3 (January)
Pages: 819-838
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Handle: RePEc:sej:ancoec:v:74:3:y:2008:p:819-838

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings, Federal Reserve Bank of Kansas City, pages 9-56. [Downloadable!]
  2. Matthew Rafferty, 2005. "The Effects of Expected and Unexpected Volatility on Long-Run Growth: Evidence from 18 Developed Economies," Southern Economic Journal, Southern Economic Association, vol. 71(3), pages 582-591, January.
  3. Saint-Paul, Gilles, 1993. "Productivity growth and the structure of the business cycle," European Economic Review, Elsevier, vol. 37(4), pages 861-883, May. [Downloadable!] (restricted)
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  4. Poterba, James M & Summers, Lawrence H, 1986. "The Persistence of Volatility and Stock Market Fluctuations," American Economic Review, American Economic Association, vol. 76(5), pages 1142-51, December. [Downloadable!] (restricted)
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  5. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December. [Downloadable!] (restricted)
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  6. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32. [Downloadable!]
  7. Speight, Alan E H, 1999. "UK Output Variability and Growth: Some Further Evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(2), pages 175-84, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giorgio Canarella & WenShwo Fang & Stephen M. Miller & Stephen K. Pollard, 2008. "Is the Great Moderation Ending? UK and US Evidence," Working papers 2008-24, University of Connecticut, Department of Economics. [Downloadable!]
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  2. WenShwo Fang & Stephen M. Miller, 2009. "Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited," Working Papers 0904, University of Nevada, Las Vegas , Department of Economics. [Downloadable!]
    Other versions:
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