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

Posted: 23 Apr 2007 Last revised: 19 Aug 2008

See all articles by Wen-Shwo Fang

Wen-Shwo Fang

Feng Chia University - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; 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.

Keywords: Great Moderation, economic growth and volatility, structural change in variance, IGARCH

JEL Classification: C32, E32, O40

Suggested Citation

Fang, Wen-Shwo and Miller, Stephen M., The Great Moderation and the Relationship between Output Growth and its Volatility. Southern Economic Journal, Vol. 74, No. 3, pp. 819-838, January 2008, Available at SSRN: https://ssrn.com/abstract=981260

Wen-Shwo Fang

Feng Chia University - Department of Economics ( email )

100, WenHwa Rd
Talchung
Taiwan

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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