The Global Extent of the Great Moderation*
| DOI | http://doi.org/10.1111/j.1468-0084.2011.00659.x |
| Author | Bruno Ćorić |
| Published date | 01 August 2012 |
| Date | 01 August 2012 |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2011. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 74, 4 (2012) 0305-9049
doi: 10.1111/j.1468-0084.2011.00659.x
The Global Extent of the Great Moderation*
Bruno ´
Cori´
c
Faculty of Economics, University of Split, Matice hrvatske 31, 21000 Split, Croatia
(e-mail: bcoric@efst.hr)
Abstract
In 2008 the US financial crisis spilled over into a number of other economies causing
declines in GDP across the world. Yet the decades preceding the current downturn had
been a period of unprecedented stability for the US economy. This article examines annual
data for 98 countries over the period 1961–2007 and finds that lower GDP growth volatility
in the period preceding the current crisis was not confined to the US. It is detected in a
number of developed and developing countries, suggesting that a reduction in volatility in
this period was a more general phenomenon.
I. Introduction
The collapse of the subprime mortgages market at the end of summer 2007 triggered one
of the most severe financial crises in US history. By 2008, the crisis had spilled over into
a number of other economies, causing a global economic downturn.
Yet the decades preceding the current financial crisis had been a period of very low
volatility for the US economy. In particular, analysis of US quarterly GDP growth rates
in the period after World War II revealed a large decline in short-run volatility after 1984
(Kim and Nelson, 1999; McConnell and Perez-Quiros, 2000). This decline was sufficiently
pronounced to be characterized by the literature as ‘The Great Moderation’. Similarly, as
is the case with the current economic downturn, such moderation was not confined to the
United States alone. The decline in output growth volatility has been detected for most of
the G7, as well as for several other developed market economies (Blanchard and Simon,
2001; Dalsgaard, Elmeskov and Park, 2002; Mills and Wang, 2003; Stock and Watson,
2003, 2005; Fritsche and Kuzin, 2005; Del Negro and Otrok, 2008). Yet, the empirical
literature does not provide information about the scope of reduction in GDP growth vola-
tility from a global perspective.
The current crisis demonstrates the strong connections among national economies
today. This gives new interest to the question of whether the Great Moderation was confined
ÅThis article is based on the first chapter of the author’s PhD dissertation at Staffordshire University.The author
thanks NickAdnett, Geoff Pugh, Bill Russell, Ahmad Seyf, Jonathan Temple and anonymous referee for very helpful
comments and suggestions. The author is also very grateful to Jushan Bai, Ante Deni´c, Anthony Pecotich, Pierre
Perron and Achim Zeileis for their help with the test for multiple structural changes. All remaining errors are mine.
The article was previously in circulation under the title, Changes in Short-run Volatilityof World Economies.
JEL Classification numbers: E32, F41.
494 Bulletin
to some of the developed countries, or whether it was a pervasive worldwide phenomenon.
This study attempts to provide information about GDP growth volatility of both developed
and developing countries in the decades preceding the current global downturn. To ad-
dress this question, we have collected data for 98 national economies from 1961–2007 and
tested for structural changes in GDP growth volatility over that period, for each country
separately.
The study is organized as follows. Section II describes the data sample, discusses the
selection of an appropriate model and testing procedure. Section III presents results con-
sidering all economies together and comparing results between different income groups.
Section IV discusses the sources of reduction in volatility. Section V concludes.
II. Data, model and methodology
Following McConnell and Perez-Quiros (2000) and Stock and Watson (2003) we test for
changes in unconditional and conditional GDP growth volatility within a linear regression
framework. This testing procedure allows us to test for structural changes in GDP growth
volatility when the date of change is unknown. At the same time, it ensures comparability
of our results with the previous findings and facilitates coherent presentation of the results
which is important because of the large number of countries included in the analysis.1
Data
The data set contains annual real GDP growth rates for the period 1961–07 for 98 coun-
tries. The GDP growth rates were obtained from the World Bank’s ‘World Development
Indicators’ online database in May 2009.2
Contrary to the previous literature, which studied changes in the quarterly growth
volatility of US GDP, we use annual data. Since reasonably long time series at quarterly
frequencies are not available for the majority of countries, annual data provide the only
option for cross-country comparison at the world level. In spite of this difference, our results
should be comparable. Namely, consistently with the results of Ahmed, Levin and Wilson
(2004) frequency-domain analysis, our results suggest that the so-called ‘Great Modera-
tion’ in the United States has been evenly distributed at various frequencies. In particular,
the results of our tests confirm the findings of Kim and Nelson (1999), McConnell and
1Other methods have also been used in this literature. Blanchard and Simon (2001), for example, used visual
analysis of a moving window standard deviation of GDP growth rates to detect changes in GDP growth volatility of
G7 countries. Although appropriate in the case where volatility of one or a few countries is examined, this method is
unsuitable for comparison of a large number of series. Dalsgaard et al. (2002) divided GDP growth data into decades
and compared the size of the standard deviation across decades. The results displayed in numerical form make this
method suitable for a comparison of a large number of series. However, the results might depend on arbitrarily chosen
time periods.
2The World Development Indicators database contained GDP growth rates for 209 countries. However, for the
majority of them the data were not available for the entire period. Since our intention is to investigate possible
changes over a longer time period, we include in the analysis only those countries for which data are available for
the whole sample period. The only exception is Germany which, because of its importance for the world economy,
is included even though data are missing for the period 1961–71. The data for Germany were kindly provided by the
Deutsche Bundesbank’s Statistics Department. The results of standard augmented Dickey–Fuller tests show that all
GDP growth rates are stationary.
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2011
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