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Estimating Structural Breaks in the Volatility of Canadian Output Growth

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Author Info
Yanjun Liu
Bing-Sun Wong
Abstract

The presence of a structural break in the volatility of GDP growth has important implications for economic modelling and econometric techniques. Recently, McConnell and Quiros (1997, 2000) have identified a structural decline in the U.S. GDP growth volatility in 1984, and they attributed the cause of the decline to the reduction in business inventory investment growth volatility. They have also reported a similar break in Canadian GDP growth volatility occurring in 1991. In this paper we build on the work of McConnell and Quiros but use a more flexible form of Markov-switching and the likelihood framework of the Andrews-Ploberger test to identify structural breaks in the Canadian GDP growth volatility. Our estimation results show that the volatility of GDP growth in Canada has shifted to a lower regime in 1987, not in 1991 as reported by McConnell and Quiros. When applying our methodology to U.S. data, we obtain the same break date as McConnell and Quiros. However, we have detected an additional break in the regression coefficients of the AR process occurring at the end of 1991. Our attempts to identify the source of the break in the Canadian GDP growth volatility yield mixed results. We found structural declines in the volatility of many GDP components’ contributions to growth, but none of the break dates is the same as that of the aggregate GDP. However, our finding of a break in the volatility of business inventory’s contribution to growth in 1984Q1 is consistent with the results of McConnell and Quiros for the U.S., suggesting that the structural change in inventory management might also have played a role in reducing GDP growth volatility in Canada.

La présence d’un bris structurel dans la volatilité de la croissance du PIB a d’importantes répercussions sur la modélisation et les techniques économétriques utilisées. McConnell et Quiros (1997, 2000) ont récemment décelé un déclin permanent de la volatilité du PIB aux États-Unis à partir de 1984, et ils l’ont imputé à une baisse de la volatilité de la croissance de l’investissement en inventaires. Ils ont également signalé un bris structurel semblable dans la volatilité de la croissance du PIB au Canada en 1991. La présente étude s’appuie sur les travaux de McConnell et Quiros mais utilise une forme plus souple des changements de régime de Markov ainsi que l’approche du maximum de vraisemblance du test Andrews-Ploberger pour identifier des bris structurels dans la volatilité de la croissance du PIB au Canada. Les résultats de nos estimations démontrent que la volatilité du PIB au Canada est passée à un régime plus faible en 1987, et non pas en 1991 tel que signalé par McConnell et Quiros. Lorsque nous appliquons notre méthodologie aux données américaines, par contre, nous obtenons la même date du bris structurel que McConnell et Quiros. Nous avons toutefois décelé un bris additionnel dans les coefficients de régression du processus AR à la fin de 1991. Nos efforts visant à identifier la source du bris structurel dans la volatilité du PIB canadien donnent des résultats mitigés. Nous avons trouvé une baisse structurelle dans la volatilité de la contribution à la croissance pour plusieurs composantes du PIB, mais aucune date de bris ne correspond à celle du PIB lui-même. Toutefois, notre découverte d’un bris structurel dans la volatilité de la contribution à la croissance de l’investissement en inventaires au 1er trimestre de 1984 est compatible avec les résultats de McConnell et Quiros pour les États-Unis, ce qui indique que le changement structurel dans la gestion des inventaires a peut être également contribué à atténuer la volatilité dans la croissance du PIB au Canada.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2003-20.

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