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The Great Moderation and The Relationship between Output Growth and Its Volatility

Author

Listed:
  • Wen-Shwo Fang

    () (Department of Economics, Feng Chia University, 100 Wen-Hwa Road, Taichung, Taiwan)

  • Stephen M. Miller

    () (College of Business, University of Nevada–Las Vegas, 4505 Maryland Parkway, Las Vegas, NV 89154-6005, USA)

Abstract

This study examines the effect of the Great Moderation on the relationship between U.S. output growth and its volatility over the period 1947 to 2006. First, we consider the possible effects of structural changes in the volatility process. We employ generalized autoregressive conditional heteroscedasticity in mean (GARCH-M) specifications, which describe output growth rate and its volatility with and without a one-time structural break in volatility. Second, our data analyses and empirical results suggest no significant relationship between the output growth rate and its volatility; this favors the traditional wisdom of dichotomy in macroeconomics. Moreover, the evidence shows that the time-varying variance falls sharply or even disappears once we incorporate a one-time structural break in the unconditional variance of output starting in 1982 or 1984. That is, the integrated GARCH effect proves spurious. Finally, a joint test of a trend change and a one-time shift in the volatility process finds that the one-time shift dominates.

Suggested Citation

  • Wen-Shwo Fang & Stephen M. Miller, 2008. "The Great Moderation and The Relationship between Output Growth and Its Volatility," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 819-838, January.
  • Handle: RePEc:sej:ancoec:v:74:3:y:2008:p:819-838
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    References listed on IDEAS

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    1. Poterba, James M & Summers, Lawrence H, 1986. "The Persistence of Volatility and Stock Market Fluctuations," American Economic Review, American Economic Association, vol. 76(5), pages 1142-1151, December.
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    More about this item

    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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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