The decline in volatility of US GDP growth

Abstract

The decline in volatility of US Gross Domestic Product (GDP) growth is a well-known stylized fact of post WWII macroeconomic data. Economists call this observation the Great Moderation. This article contributes to the discussion whether the drop in GDP volatility was a one-time break or a trend decrease (Blanchard and Simon, 2001; Fang and Miller, 2007). We provide evidence for a nonlinear time trend in the volatility of GDP growth and give support for the hypothesis that the 1970s were special in the sense of Blanchard and Simon (2001).

Acknowledgements

We thank Gregor Bäurle and seminar participants from the University of Bern for useful comments. The usual disclaimer applies.

Notes

¹Jarque–Bera , where S is the sample skewness and k the sample kurtosis.

²The oil embargo of the Arab nations against the countries supporting Israel in the Yom Kippur War took place in 1973. This caused the first oil-price shock.

³The implicit GDP deflator is from the BEA and given by the ratio of the GDP current dollar value to its chained-dollar value.

⁴The p-slope coefficients of an AR(p) are estimates of the partial autocorrelations up to lag p. As we suspect heteroscedastic errors, we use robust SEs as proposed by White (1980). This potential heteroscedasticity is also the reason why Box–Pierce and Ljung–Box tests are inappropriate.