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Regime Switches in GDP Growth and Volatility: Some International Evidence and Implications for Modeling Business Cycles

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  • Smith Penelope

    () (University of Melbourne)

  • Summers Peter M

    () (Texas Tech University)

Abstract

This paper presents additional evidence on the international nature of the Great Moderation:" the apparent structural decline in the variance of GDP growth first documented in the United States. We find evidence of a similar reduction in volatility in the other G-7 countries and Australia. However, the timing and nature of the moderation varies considerably across countries.We also assess whether and how business cycles have changed in the period since the Great Moderation. Our results suggest that in most of these countries, the major change in business cycles has been a noticeably slower rate of GDP growth in expansions. We find little evidence of milder recessions in the post-Moderation period. Although a lower variance of growth will result in longer expansions and rarer recessions, the evidence presented here suggests that recessions have been just as severe, on average, when they do occur.

Suggested Citation

  • Smith Penelope & Summers Peter M, 2009. "Regime Switches in GDP Growth and Volatility: Some International Evidence and Implications for Modeling Business Cycles," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-19, September.
  • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:36
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    References listed on IDEAS

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    1. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 61-82, Suppl. De.
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    3. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, April.
    4. Don Harding & Adrian Pagan, 1999. "Dissecting the Cycle," Melbourne Institute Working Paper Series wp1999n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    5. Hess, Gregory D & Iwata, Shigeru, 1997. "Measuring and Comparing Business-Cycle Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(4), pages 432-444, October.
    6. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
    7. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    8. Christopher A. Sims & Tao Zha, 2002. "Macroeconomic switching," Proceedings, Federal Reserve Bank of San Francisco.
    9. Koop, Gary & Potter, Simon M., 1998. "Bayes factors and nonlinearity: Evidence from economic time series1," Journal of Econometrics, Elsevier, vol. 88(2), pages 251-281, November.
    10. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
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    Citations

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    Cited by:

    1. Stephen G Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2005. "Assessing the Sources of Changes in the Volatility of Real Growth," RBA Annual Conference Volume,in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
    2. Mayer, Eric & Scharler, Johann, 2011. "Noisy information, interest rate shocks and the Great Moderation," Journal of Macroeconomics, Elsevier, pages 568-581.
    3. 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.
    4. Altug, Sumru G. & Bildirici, Melike, 2010. "Business Cycles around the Globe: A Regime-switching Approach," CEPR Discussion Papers 7968, C.E.P.R. Discussion Papers.
    5. David Shepherd & Robert Dixon, 2008. "The Cyclical Dynamics and Volatility of Australian Output and Employment," The Economic Record, The Economic Society of Australia, pages 34-49.
    6. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo Group Munich.
    7. de Mello, Luiz & Moccero, Diego, 2011. "Monetary policy and macroeconomic stability in Latin America: The cases of Brazil, Chile, Colombia and Mexico," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 229-245, February.
    8. Mayer, Eric & Scharler, Johann, 2011. "Noisy information, interest rate shocks and the Great Moderation," Journal of Macroeconomics, Elsevier, pages 568-581.
    9. Balázs Égert & Rebeca Jiménez-Rodríguez & Evžen Kočenda & Amalia Morales-Zumaquero, 2006. "Structural changes in Central and Eastern European economies: breaking news or breaking the ice?," Economic Change and Restructuring, Springer, vol. 39(1), pages 85-103, June.
    10. Peter M. Summers & Penelope A. Smith, 2005. "How well do Markov switching models describe actual business cycles? The case of synchronization," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 253-274.
    11. Lin, Justin Yifu & Fardoust, Shahrokh & Rosenblatt, David, 2012. "Reform of the international monetary system : a jagged history and uncertain prospects," Policy Research Working Paper Series 6070, The World Bank.
    12. Penelope A. Smith & Lei Lei Song, 2005. "Response of Consumption to Income, Credit and Interest Rate Changes in Australia," Melbourne Institute Working Paper Series wp2005n20, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    13. Wenjuan Chen, 2011. "On the Continuation of the Great Moderation:New evidence from G7 Countries," SFB 649 Discussion Papers SFB649DP2011-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    14. Penelope A. Smith & Peter M. Summers, 2004. "Identification and normalization in Markov switching models of "business cycles"," Research Working Paper RWP 04-09, Federal Reserve Bank of Kansas City.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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