How Fat-Tailed is US Output Growth?

Reiner Franke

Metroeconomica, 2015, vol. 66, issue 2, 213-242

Abstract: Several studies have recently rejected the common hypothesis that aggregate output is normally distributed. The present paper reconsiders this issue for US output growth. To this end, it focusses on the shape parameter b of the exponential power distribution (EPD), the two polar values of which constitute the normal distribution and the Laplace distribution with its fatter tails, respectively. The paper first warns against premature conclusions that neglect a structural break in output volatility. On the basis of a battery of Monte Carlo experiments, it is then found out that the results strongly depend on which subperiod is considered, the Great Inflation (GI) or the Great Moderation (GM) period, and which data are referred to, the growth rates of GDP, firm sector output, and quarterly or monthly industrial production (IP). Here, only quarterly IP can be said to exhibit fat tails in GI as well as GM; other evidence is mixed.

Date: 2015
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