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Changes in variability of the business cycle in the G7 countries

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Author Info

  • van Dijk, D.J.C.
  • Osborn, D.R.
  • Sensier, M.

Abstract

Volatility breaks are tested and documented for 19 important monthly macroeconomic time series across the G7 countries. Across all conditional mean specifications considered, including both linear and nonlinear models with and without a structural break, volatility breaks are found to be widespread. This continues to hold when business cycle nonlinearities are allowed in the variance. Multiple volatility breaks are also examined, and these are found to be especially prevalent for short-term interest rates. Volatility breaks in industrial production and consumer prices are largely synchronous across the G7. The facts established are discussed in the context of some explanations put forward in the literature to explain volatility breaks previously found for US series.

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File URL: http://repub.eur.nl/pub/551/feweco20020919164617.pdf
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Bibliographic Info

Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2002-28.

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Date of creation: 19 Sep 2002
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Handle: RePEc:ems:eureir:551

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Keywords: Business cycle nonlinearity; Growth; Structural change tests; Volatility;

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  2. Massimiliano Marcellino, . "Instability and non-linearity in the EMU," Working Papers 211, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  5. Mark W. Watson, 1999. "Explaining the increased variability in long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 71-96.
  6. Chauvet, Marcelle & Potter, Simon, 2001. "Recent Changes in the US Business Cycle," Manchester School, University of Manchester, vol. 69(5), pages 481-508, Special I.
  7. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2002. "Technology Shocks and Monetary Policy: Assessing the Fed's Performance," NBER Working Papers 8768, National Bureau of Economic Research, Inc.
  8. Mark W. French & Daniel E. Sichel, 1991. "Cyclical patterns in the variance of economic activity," Finance and Economics Discussion Series 161, Board of Governors of the Federal Reserve System (U.S.).
  9. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  10. Bruce E. Hansen, 1995. "Approximate Asymptotic P-Values for Structural Change Tests," Boston College Working Papers in Economics 297., Boston College Department of Economics.
  11. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
  12. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
  13. Brunner, Allan D, 1992. "Conditional Asymmetries in Real GNP: A Seminonparametric Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 65-72, January.
  14. Margaret M. McConnell & Patricia C. Mosser & Gabriel Perez Quiros, 1999. "A decomposition of the increased stability of GDP growth," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Aug).
  15. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  16. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  17. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 395-432, July.
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Citations

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Cited by:
  1. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo Group Munich.
  2. Giuseppe Cavaliere & Peter C.B. Phillips & Stephan Smeekes & A.M. Robert Taylor, 2012. "Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility," Cowles Foundation Discussion Papers 1844, Cowles Foundation for Research in Economics, Yale University.
  3. Ke-Li Xu & Peter C.B. Phillips, 2006. "Adaptive Estimation of Autoregressive Models with Time-Varying Variances," Cowles Foundation Discussion Papers 1585R, Cowles Foundation for Research in Economics, Yale University, revised Nov 2006.
  4. Brian M. Doyle & Jon Faust, 2003. "Breaks in the variability and co-movement of G-7 economic growth," International Finance Discussion Papers 786, Board of Governors of the Federal Reserve System (U.S.).
  5. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2007. "Testing for unit roots in time series models with non-stationary volatility," Journal of Econometrics, Elsevier, vol. 140(2), pages 919-947, October.
  6. Giuseppe Cavaliere & Anders Rahbek & A.M.Robert Taylor, 2008. "Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility," CREATES Research Papers 2008-50, School of Economics and Management, University of Aarhus.
  7. 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.
  8. Ossama Mikhail, 2004. "No More Rocking Horses: Trading Business-Cycle Depth for Duration Using an Economy-Specific Characteristic," Macroeconomics 0402026, EconWPA.
  9. Ossama Mikhail, 2006. "Trading Business-Cycle Depth for Duration using an economy-specific characteristic," Economics Bulletin, AccessEcon, vol. 5(7), pages 1-12.

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