Does the Great Recession Imply the End of the Great Moderation? International Evidence

Abstract

In this paper we examine whether or not the Great Recession had a temporary or permanent effect on output growth volatility after years of low macroeconomic volatility since the early eighties. Based on break detection methods applied to a set of advanced countries, our empirical results do not give evidence to the end of the Great Moderation period but rather that the Great Recession is characterized by a dramatic short-lived effect on the output growth but not on its volatility.We show that neglecting the breaks both in mean and in variance can have large effects on output volatility modeling based on GARCH specifications.

It ain’t over till it’s over: A global perspective on the Great Moderation-Great Recession interconnection

“…Due to sign compensations, the increased variability of some important sources of shocks did not affect the actual volatility of global output until the recent Great Recession episode and went unnoticed in the literature. In fact, many empirical studies relate the widening in real activity fluctuations to the 2008-2009 recession only (Clark 2009;Canarella et al 2010;Chen 2011;Stock and Watson 2012;Charles, Darné, and Ferrara 2014;Gadea, GomezLoscos, and Pérez-Quiros 2014), whereas our findings point to an increase in volatility of various important sources of disturbances preceding the onset of the Great Recession. Moreover, at a more general level, they also raise the issue of the potential contribution of financial innovation and liberalization to macroeconomic instability, as the widening in real activity fluctuations associated with productivity, portfolio allocation and aggregate demand disturbances might be related to changes in the financial structure of the global economy.…”

“…Stock and Watson (2012) and Gadea, Gomez-Loscos and Pérez-Quiros (2014) do not detect any structural change in the volatility and in other properties of the U.S. business cycle in the aftermath of the Great Recession. Chen (2011) points to a reversion towards a low-volatility regime in the G7 countries already occurring about the end of 2009. International evidence of a purely temporary change in the GDP growth rate is also detected by Charles, Darné and Ferrara (2014). Larger oil price and financial disturbances ('bad luck') would then be at the root of the rise in macroeconomic uncertainty caused by the financial crisis, driving the transition from the Great Moderation to the Great Recession (Clark 2009).…”

Structural Breaks in Potential GDP of Three Major Economies: Just Impaired Credit or the 'New Normal'?

“…They develop a two-break detection procedure for detecting both the entrance and exit to the contraction in the same test based on Bai (1999). In contrast to our paper, they ignore the dynamics of other Our results are closer to Charles et al (2014), though we test potential output rather than actual data, and we find the breaks around the dates of the Great Recession with both the Chen-Liu test and the Bai-Perron test.…”

“…There is another way to test for structural breaks which accounts for the nature of the break, namely distinguishing between permanent and transitory breaks. Charles et al (2014) approached this question with a Chen-Liu test using the tsoutliers package of R. We follow suit with a distinction between the additive-outlier, level-shift and temporary-change types of breaks, and test whether some (or all) of them occur for the break dates selected by the Bai-Perron test.…”

Business cycle dynamics after the Great Recession

“…that economic growth would rapidly revert back to its long-term average (see Ferrara and Marsilli 2017 for an assessment of IMF forecasts). In addition, changes in macroeconomic volatility over the last decade further complicated the task of forecasters: after two decades of dampened macroeconomic fluctuations, referred to as the "Great Moderation" period (McConnell and Perez-Quiros, 2000), macroeconomic volatility increased during the Great Recession and apparently subsequently went down (Charles et al 2018, Gadea-Rivas et al, 2018.…”