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Measuring The International Dimension Of Output Volatility

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  • Gerdie Everaert
  • Martin Iseringhausen

Abstract

This paper studies output fluctuations in a panel of OECD economies with the aim to decompose the evolution in output volatility into domestic and international factors. To this end we use a factor-augmented dynamic panel model with both domestic and international shocks and spillovers between countries through trade linkages. Changes in the volatility of output growth can be due to a time-varying sensitivity to these shocks, changes in the propagation mechanism or shifts in the variances of shocks. We explicitly model cross-sectional dependence in the variance equation by specifying a common factor structure in the volatility of domestic shocks. The results show that while the size of international shocks and spillovers does not decrease in most countries, the volatilities of domestic shocks share a clear common decreasing trend. Hence, the `Great Moderation' appears to be mainly driven by a decline in the volatility of domestic shocks rather than smaller international shocks.

Suggested Citation

  • Gerdie Everaert & Martin Iseringhausen, 2017. "Measuring The International Dimension Of Output Volatility," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/928, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:17/928
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    More about this item

    Keywords

    Volatility; business cycle; Bayesian model selection;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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