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The Great Moderation and the Relationship between Output Growth and Its Volatility
Author(s) -
Fang WenShwo,
Miller Stephen M.
Publication year - 2008
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2008.tb00866.x
Subject(s) - great moderation , volatility (finance) , econometrics , spurious relationship , autoregressive conditional heteroskedasticity , economics , heteroscedasticity , forward volatility , moderation , conditional variance , autoregressive model , stochastic volatility , statistics , mathematics
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 changes in the volatility process. We employ generalized autoregressive conditional heteroscedasticity in mean (GARCH‐M) specifications, which describe 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; this favors 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 in 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.