The ‘great Moderation’ in OECD countries: Its deepness and implications with business cycles

This paper presents an empirical analysis of the "Great Moderation" phenomenon characterized by a decrease of volatility in GDP real growth rates, using quarterly data for the OECD member states over the period 1960-2010. This paper expands the existing literature on methodological and empirical grounds. We use a GARCH modeling approach with endogenously determined structural breaks in both the trend and volatility, which provides more accurate way to model output volatility. The objectives of this paper are threefold: (1) to assess the occurrence of "the Great Moderation" and identify the timings of volatility changes; (2) to analyse the time varying nature of volatility, in particular whether it has been subject to gradual shifts over time or one-off major shifts, as well as the degree of symmetry/asymmetry across different phases of the business cycle; (3) to analyse the dynamic pattern of (a)symmetric behaviour over the sample period. The results reveal a progressive "moderation" in all countries, characterized by regime changes in both growth rates and volatility and suggest that countries differ on the relative magnitude of the impacts of negative shocks on volatility, relatively to those of positive shocks of similar magnitude over the sample period. The disaggregated analysis over subperiods reveals an increasing pattern of these asymmetries, as well as huge differences among the countries. While this suggests a higher vulnerability to negative exogenous shocks in some OECD economies, although with different levels, some economies seem to have developed higher levels of immunity to external shocks by reaching balanced effects from positive and negative shocks