IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

What's so Great about the Great Moderation? A Multi-Country Investigation of Time-Varying Volatilities of Output Growth and Inflation

  • John W. Keating

    (Department of Economics, The University of Kansas)

  • Victor J. Valcarcel

    (Department of Economics, Texas Tech University)

Changes in volatility of output growth and inflation are examined for eight countries with at least 140 years of uninterrupted data. Time-varying parameter vector autoregressions are used to estimate standard deviations of each variable. Both volatilities rise quickly with World War I and its aftermath, stay relatively high until the end of World War II, and then drop rapidly until the mid- to late 1960s. This Postwar Moderation typically yields the largest decline in output growth volatilities. For all countries, volatilities of both output growth and inflation fall more during this Postwar Moderation than during the Great Moderation, and often the difference is huge. Both volatilities typically reach their lowest levels following the Great Moderation. The Great Moderation often counteracts an increase in volatility that took place in the 1970s, particularly for inflation. In nearly all the countries in our sample, the recent financial crisis has eliminated the stability gains associated with the Great Moderation, and sometimes it has even eroded gains made during the Postwar Moderation. Periods in which a fixed exchange rate system was widespread are associated with relatively low volatilities for both variables. Based on our structural VAR identification, permanent shocks to output account for nearly all of the fluctuations in the volatility of output growth while shocks that have only a temporary effect on output explain most of the fluctuations in inflation volatility. These last two findings suggest that changes in the volatility for each variable are primarily driven by a fundamentally different type of disturbance.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www2.ku.edu/~kuwpaper/2009Papers/201204.pdf
Download Restriction: no

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201204.

as
in new window

Length: 37 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:kan:wpaper:201204
Contact details of provider: Postal: 415 Snow Hall, Lawrence, KS 66045
Phone: (785) 864-3501
Fax: (785) 864-5270
Web page: http://www2.ku.edu/~kuwpaper/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Atsushi Inoue & Barbara Rossi, 2011. "Identifying the Sources of Instabilities in Macroeconomic Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1186-1204, November.
  2. Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  3. Nason James M. & Smith Gregor W, 2008. "Great Moderation(s) and US Interest Rates: Unconditional Evidence," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-33, November.
  4. John W. Keating & Victor J. Valcarcel, 2012. "The Time Varying Effects of Permanent and Transitory Shocks to Real Output," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201203, University of Kansas, Department of Economics.
  5. Christopher Erceg & Luca Guerrieri & Christopher Gust, 2004. "Can long-run restrictions identify technology shocks?," International Finance Discussion Papers 792, Board of Governors of the Federal Reserve System (U.S.).
  6. John W. Keating & Victor J. Valcarcel, 2012. "Greater Moderations," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201202, University of Kansas, Department of Economics.
  7. 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.
  8. Lutz Kilian, 2013. "Structural vector autoregressions," Chapters, in: Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 22, pages 515-554 Edward Elgar.
  9. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-53, July.
  10. Guido Ascari & Tiziano Ropele, 2007. "Trend Inflation, Taylor Principle and Indeterminacy," Kiel Working Papers 1332, Kiel Institute for the World Economy.
  11. 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.
  12. 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)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kan:wpaper:201204. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jianbo Zhang)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.