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The Decline in Australian Output Volatility

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  • John Simon

    (Reserve Bank of Australia)

Abstract

There has been a large decline in the volatility of Australian output over the past 40 years. This paper looks at the causes of this decline. Accounting for part of the change have been substantial changes in the inventories cycle. Abstracting from changes in the inventories cycle there have also been significant declines in underlying output volatility. This paper focuses on the underlying structural factors for the reduction in volatility. It finds that the principal cause of the decline has been a decline in the shocks hitting the economy rather than an increase in structural stability. Furthermore, the primary explanation seems to lie in a reduction in the volatility of supply or ‘productivity’ shocks. The ultimate source of these productivity shocks is left as an open question.

Suggested Citation

  • John Simon, 2001. "The Decline in Australian Output Volatility," RBA Research Discussion Papers rdp2001-01, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2001-01
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    Cited by:

    1. Mardi Dungey, 2005. "Discussion of 'Assessing the Sources of Changes in the Volatility of Real Growth'," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & David Norman (ed.),The Changing Nature of the Business Cycle, Reserve Bank of Australia.
    2. Ric Battellino & Michael Plumb, 2011. "A generation of an internationalised Australian dollar," BIS Papers chapters, in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 202-217, Bank for International Settlements.
    3. Robert Buckle & David Haugh & Peter Thomson, 2003. "Calm after the storm? Supply-side contributions to New Zealand's GDP volatility decline," New Zealand Economic Papers, Taylor & Francis Journals, vol. 37(2), pages 217-243.
    4. Christopher Kent & Kylie Smith & James Holloway, 2005. "Declining Output Volatility: What Role for Structural Change?," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & David Norman (ed.),The Changing Nature of the Business Cycle, Reserve Bank of Australia.
    5. Ulrich Fritsche & Vladimir Kuzin, 2005. "Declining output volatility in Germany: impulses, propagation, and the role of monetary policy," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2445-2457.
    6. Luke Hartigan & Michelle Wright, 2021. "Financial Conditions and Downside Risk to Economic Activity in Australia," RBA Research Discussion Papers rdp2021-03, Reserve Bank of Australia.
    7. Robert A Buckle & David Haugh & Peter Thomson, 2002. "Growth and volatility regime switching models for New Zealand GDP data," Treasury Working Paper Series 02/08, New Zealand Treasury.
    8. Kihaule, Arnold Mathias, 2012. "The impact of economic policy shocks on the outcomes of the fiscal adjustment policies in Tanzania," MPRA Paper 46151, University Library of Munich, Germany, revised Feb 2013.
    9. JONATHAN McCARTHY & EGON ZAKRAJSEK, 2007. "Inventory Dynamics and Business Cycles: What Has Changed?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 591-613, March.
    10. Christian Gillitzer & Jonathan Kearns & Anthony Richards, 2005. "The Australian Business Cycle: A Coincident Indicator Approach," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & David Norman (ed.),The Changing Nature of the Business Cycle, Reserve Bank of Australia.
    11. Buch Claudia M. & Pierdzioch Christian & Doepke Joerg, 2004. "Business Cycle Volatility in Germany," German Economic Review, De Gruyter, vol. 5(4), pages 451-479, December.
    12. H. Badinger, 2009. "Fiscal rules, discretionary fiscal policy and macroeconomic stability: an empirical assessment for OECD countries," Applied Economics, Taylor & Francis Journals, vol. 41(7), pages 829-847.
    13. Christopher Kent & Kylie Smith & James Holloway, 2005. "Declining Output Volatility: What Role for Structural Change?," RBA Research Discussion Papers rdp2005-08, Reserve Bank of Australia.
    14. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed? Evidence and Explanations," Working Papers 2003-2, Princeton University. Economics Department..
    15. Taylor, Andrew & Shepherd, David & Duncan, Stephen, 2005. "The structure of the Australian growth process: A Bayesian model selection view of Markov switching," Economic Modelling, Elsevier, vol. 22(4), pages 628-645, July.
    16. Kritchaya Pattanachak & Jin Man Lee, 2010. "Sources of output volatility from financial crisis in emerging markets," Applied Financial Economics, Taylor & Francis Journals, vol. 20(3), pages 183-199.
    17. Barrera, Carlos R., 2011. "Impacto amplificador del ajuste de inventarios ante choques de demanda según especificaciones flexibles," Working Papers 2011-009, Banco Central de Reserva del Perú.
    18. Brian M. Doyle & Jon Faust, 2005. "Breaks in the Variability and Comovement of G-7 Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 721-740, November.
    19. Carlos R. Barrera Chaupis, 2018. "Inventory Adjustments to Demand Shocks under Flexible Specifications," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(1), pages 149-201, january-j.
    20. 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.
    21. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo.
    22. Ossama Mikhail, 2004. "No More Rocking Horses: Trading Business-Cycle Depth for Duration Using an Economy-Specific Characteristic," Macroeconomics 0402026, University Library of Munich, Germany.
    23. Robert McCauley, 2006. "Internationalising a currency: the case of the Australian dollar," BIS Quarterly Review, Bank for International Settlements, December.
    24. David Shepherd & Robert Dixon, 2010. "The not-so-great moderation? Evidence on changing volatility from Australian regions," Department of Economics - Working Papers Series 1090, The University of Melbourne.

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    More about this item

    Keywords

    business cycles; output growth; structural VAR; volatility;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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