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Changes in Variability of the Business Cycle in the G7 Countries

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Author Info

  • D van Dijk
  • D R Osborn
  • M Sensier

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://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr16.pdf
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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 16.

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Length: 54 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:man:cgbcrp:16

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Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/
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Related research

Keywords: volatility; growth; structural change tests; business cycle nonlinearity;

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References

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  1. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  3. Chang-Jin Kim & Charles Nelson & Jeremy Piger, 2001. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," International Finance Discussion Papers 707, Board of Governors of the Federal Reserve System (U.S.).
  4. 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).
  5. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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  7. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  8. Bruce E. Hansen, 1995. "Approximate Asymptotic P-Values for Structural Change Tests," Boston College Working Papers in Economics 297., Boston College Department of Economics.
  9. 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.
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  15. 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.
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  17. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2002. "Technology Shocks and Monetary Policy: Assessing the Fed's Performance," CEPR Discussion Papers 3211, C.E.P.R. Discussion Papers.
  18. 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.
  19. M. V. Cacdac Warnock & Francis E. Warnock, 2000. "The declining volatility of U.S. employment: was Arthur Burns right?," International Finance Discussion Papers 677, Board of Governors of the Federal Reserve System (U.S.).
  20. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  21. Marcellino, Massimiliano, 2002. "Instability and Non-Linearity in the EMU," CEPR Discussion Papers 3312, C.E.P.R. Discussion Papers.
  22. Marcelle Chauvet & Simon Potter, 2001. "Recent changes in the U.S. business cycle," Staff Reports 126, Federal Reserve Bank of New York.
  23. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
  24. 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. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  2. 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.
  3. Ossama Mikhail, 2006. "Trading Business-Cycle Depth for Duration using an economy-specific characteristic," Economics Bulletin, AccessEcon, vol. 5(7), pages 1-12.
  4. Brian M. Doyle & Jon Faust, 2005. "Breaks in the Variability and Comovement of G-7 Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 721-740, November.
  5. 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.
  6. Xu, Ke-Li & Phillips, Peter C.B., 2008. "Adaptive estimation of autoregressive models with time-varying variances," Journal of Econometrics, Elsevier, vol. 142(1), pages 265-280, January.
  7. Ossama Mikhail, 2004. "No More Rocking Horses: Trading Business-Cycle Depth for Duration Using an Economy-Specific Characteristic," Macroeconomics 0402026, EconWPA.
  8. 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.
  9. Dong Jin Lee, 2011. "Bootstrap Tests for Structural Breaks When the Regressors and Error Term are Nonstationary," Working papers 2011-05, University of Connecticut, Department of Economics.
  10. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo Group Munich.
  11. Heather Anderson & Farshid Vahid, 2003. "The Decline in Income Growth Volatility in the United States: Evidence from Regional Data," Monash Econometrics and Business Statistics Working Papers 21/03, Monash University, Department of Econometrics and Business Statistics.
  12. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2008. "Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility," Discussion Papers 08-34, University of Copenhagen. Department of Economics.
  13. Mitra, Sinchan & Sinclair, Tara M., 2012. "Output Fluctuations In The G-7: An Unobserved Components Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(03), pages 396-422, June.
  14. Niels Haldrup & Robinson Kruse & Timo Teräsvirta & Rasmus T. Varneskov, 2012. "Unit roots, nonlinearities and structural breaks," CREATES Research Papers 2012-14, School of Economics and Management, University of Aarhus.

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