CAUSES OF THE GREAT MODERATION RE-STUDIED
(2014) NEKN01 20141Department of Economics
- Abstract
- The purpose of this paper is to perform a new study to add support for one of the three explanations of the Great Moderation; the explanation based on a change in monetary policy. The study focuses on the U.S., the U.K., and Australia during the period 1970 Q1-2013 Q3. The study is performed by exploring whether the Moderation (persistent decline in output volatility) was caused by volatility behaviors, namely; a reduction in Inflation volatility, Long-term Interest rate volatility and Stock prices volatility.
GARCH models are applied to study the correlation between these volatilities. Reduced volatility in inflation is discovered to be the cause of the decline in real output volatility. I could not reject the hypothesis of no... (More) - The purpose of this paper is to perform a new study to add support for one of the three explanations of the Great Moderation; the explanation based on a change in monetary policy. The study focuses on the U.S., the U.K., and Australia during the period 1970 Q1-2013 Q3. The study is performed by exploring whether the Moderation (persistent decline in output volatility) was caused by volatility behaviors, namely; a reduction in Inflation volatility, Long-term Interest rate volatility and Stock prices volatility.
GARCH models are applied to study the correlation between these volatilities. Reduced volatility in inflation is discovered to be the cause of the decline in real output volatility. I could not reject the hypothesis of no significant relationship between inflation volatility and real output volatility in all the countries considered. The results lend considerable support to the change in monetary policy as the cause of the Great Moderation. The other two explanations for the Great moderation are believed to be structural and technological changes and “Good Luck” hypothesis. The basic interest of this study was on financial variables and their predicative power. It is believed that financial variables have less predicative powers in explaining these other two causes, therefore are not considered.
No significant correlation was found between interest rate, stock price volatility and output gap volatility. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4777597
- author
- Karungi, Doreen LU
- supervisor
- organization
- alternative title
- GARCH APPROACH
- course
- NEKN01 20141
- year
- 2014
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Output gap, The Great Moderation, Volatility, GARCH, HP-Filter.
- language
- English
- id
- 4777597
- date added to LUP
- 2014-11-13 09:10:38
- date last changed
- 2014-11-13 09:10:38
@misc{4777597, abstract = {{The purpose of this paper is to perform a new study to add support for one of the three explanations of the Great Moderation; the explanation based on a change in monetary policy. The study focuses on the U.S., the U.K., and Australia during the period 1970 Q1-2013 Q3. The study is performed by exploring whether the Moderation (persistent decline in output volatility) was caused by volatility behaviors, namely; a reduction in Inflation volatility, Long-term Interest rate volatility and Stock prices volatility. GARCH models are applied to study the correlation between these volatilities. Reduced volatility in inflation is discovered to be the cause of the decline in real output volatility. I could not reject the hypothesis of no significant relationship between inflation volatility and real output volatility in all the countries considered. The results lend considerable support to the change in monetary policy as the cause of the Great Moderation. The other two explanations for the Great moderation are believed to be structural and technological changes and “Good Luck” hypothesis. The basic interest of this study was on financial variables and their predicative power. It is believed that financial variables have less predicative powers in explaining these other two causes, therefore are not considered. No significant correlation was found between interest rate, stock price volatility and output gap volatility.}}, author = {{Karungi, Doreen}}, language = {{eng}}, note = {{Student Paper}}, title = {{CAUSES OF THE GREAT MODERATION RE-STUDIED}}, year = {{2014}}, }