Cross-Country Evidence on Output Growth Volatility: Nonstationary Variance and GARCH Models

WenShwo Fang, Stephen Miller and ChunShen Lee

No 2007-20, Working papers from University of Connecticut, Department of Economics

Abstract: This paper revisits the issue of conditional volatility in real GDP growth rates for Canada, Germany, Italy, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the six countries became noticeably less volatile over the past few decades. In this paper, we employ the modified ICSS algorithm to detect structural change in the variance of output growth. One structural break exists in each of the six countries after identifying outliers and mean shifts in the growth rates. We then use generalized autoregressive conditional heteroskedasticity ( GARCH) specifications, modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada and Japan, and disappears entirely in Germany, Italy, the U.K. and the U.S., once we incorporate the break in the variance equation of output for the six countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary variance. Moreover, we also consider the possible effects of our more correct measure of output volatility on output growth as well as the reverse effect of output growth on its volatility. The conditional standard deviation possesses no statistical significance in all countries, except a significant negative effect in Japan. The lagged growth rate of output produces significant negative and positive effects on the conditional variances in Germany and Japan, respectively. No significant effects exist in Canada, Italy, the U.K., and the U.S.

Keywords: Nonstationary variance; the Great Moderation; real GDP growth and volatility; modified ICSS algorithm; IGARCH effect (search for similar items in EconPapers)
JEL-codes: C32 E32 O40 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-04, Revised 2008-03
New Economics Papers: this item is included in nep-bec and nep-mac
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Citations: View citations in EconPapers (29)

Published in Scottish Journal of Political Economy, September 2008

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Related works:
Journal Article: CROSS‐COUNTRY EVIDENCE ON OUTPUT GROWTH VOLATILITY: NONSTATIONARY VARIANCE AND GARCH MODELS (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2007-20

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