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Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited

  • WenShwo Fang

    (Feng Chia University
    University of Connecticut)

  • Stephen M. Miller

    (University of Nevada, Las Vegas, and University of Connecticut)

Previous studies (e.g., Hamori, 2000; Ho and Tsui, 2003; Fountas et al., 2004) find high volatility persistence of economic growth rates using generalized autoregressive conditional heteroskedasticity (GARCH) specifications. This paper reexamines the Japanese case, using the same approach and showing that this finding of high volatility persistence reflects the Great Moderation, which features a sharp decline in the variance as well as two falls in the mean of the growth rates identified by Bai and Perron's (1998, 2003) multiple structural change test. Our empirical results provide new evidence. First, excess kurtosis drops substantially or disappears in the GARCH or exponential GARCH model that corrects for an additive outlier. Second, using the outlier-corrected data, the integrated GARCH effect or high volatility persistence remains in the specification once we introduce intercept-shift dummies into the mean equation. Third, the time-varying variance falls sharply, only when we incorporate the break in the variance equation. Fourth, the ARCH in mean model finds no effects of our more correct measure of output volatility on output growth or of output growth on its volatility.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2008-47.

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Length: 45 pages
Date of creation: Dec 2008
Date of revision:
Publication status: Published in Japan and the World Economy, August 2009.
Handle: RePEc:uct:uconnp:2008-47
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Web page: http://www.econ.uconn.edu/

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