The Great Moderation and The Relationship between Output Growth and Its Volatility
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.
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Volume (Year): 74 (2008)
Issue (Month): 3 (January)
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- Poterba, James M & Summers, Lawrence H, 1986.
"The Persistence of Volatility and Stock Market Fluctuations,"
American Economic Review,
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- James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
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- Saint-Paul, Gilles, 1992. "Productivity Growth and the Structure of the Business Cycle," CEPR Discussion Papers 709, C.E.P.R. Discussion Papers.
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- Matthew Rafferty, 2005. "The Effects of Expected and Unexpected Volatility on Long-Run Growth: Evidence from 18 Developed Economies," Southern Economic Journal, Southern Economic Association, vol. 71(3), pages 582-591, January.
- 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. Full references (including those not matched with items on IDEAS)
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