The variance of economic activity over the business cycle: some further evidence

Abstract

This letter tests for the presence of non-linearities in UK and US industrial and sectoral production growth rates using a joint model of bilinearity inconditional mean and generalized-autoregressive-conditional heteroscedasticity, the latter augmented by lagged production growth rates so as to allow consideration of variance asymmetry with respect to the phase of the business cycle. We find bilinearity inconditional mean to be present in US industrial production and manufacturing, and significant conditional variance asymmetries in the majority of series considered such that conditional variance is higher during recessions and stronger in the more cyclically sensitive durable consumer goods sectors.