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

WenSho Fang and Stephen Miller
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WenSho Fang: Feng Chia University

No 2007-04, Working papers from University of Connecticut, Department of Economics

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 change in the volatility process. In so doing, we employ GARCH-M and ARCH-M specifications of the process describing 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, favoring 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 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.

Keywords: Great Moderation; economic growth and volatility; structural change in variance; IGARCH (search for similar items in EconPapers)
JEL-codes: C32 E32 O40 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-03
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Southern Economic Journal, January 2008

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Journal Article: The Great Moderation and the Relationship between Output Growth and Its Volatility (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2007-04

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