Seminars 2007 — Abstracts

Friday, October 5

Speaker: Aziz Hayat, Monash

Title: Nature of Stability in Output Volatility

Abstract: There has been a great deal of work explaining the economic causes of decline in the volatility of US output fluctuations since mid 1980s. We provide an another insight into the nature of stability in output volatility. We investigated this matter by considering the time series properties of seasonally adjusted (SA) real GDP (RGDP). We find that the decline in the volatility of SA Australian and US RGDP fluctuations could just be an artefact of the (relative) growth definition. We identified a structural break in the first difference of SA Australian and US RGDP data in September 1983 and March 1983 respectively using sample period from September 1959 to June 2002. Taking these structural breaks into account, we showed that the conditional variance of growth of SA RGDP when SA RGDP in level is modeled as a random walk with the structural break(s) in drift (RWSD) declines over time. The decline explained by RWSD model in the variance of SA RGDP growth since mid 1980s closely matches with the decline observed in the variance of growth of SA Australian and US RGDP data. The model reveals that the Australian output volatility is converging to a value which is very close to the US output volatility.