| Abstract: |
Previous studies (e.g., Hamori, 2000; Ho and Tsui, 2003; Fountas et al., 2004)
find high volatility persistence of economic growth rates using generalized
autoregressive conditional heteroskedasticity (GARCH) specifications. This
paper reexamines the Japanese case, using the same approach and showing that
this finding of high volatility persistence reflects the Great Moderation,
which features a sharp decline in the variance as well as two falls in the
mean of the growth rates identified by Bai and Perron’s (1998, 2003) multiple
structural change test. Our empirical results provide new evidence. First,
excess kurtosis drops substantially or disappears in the GARCH or exponential
GARCH model that corrects for an additive outlier. Second, using the
outlier-corrected data, the integrated GARCH effect or high volatility
persistence remains in the specification once we introduce intercept-shift
dummies into the mean equation. Third, the time-varying variance falls
sharply, only when we incorporate the break in the variance equation. Fourth,
the ARCH in mean model finds no effects of our more correct measure of output
volatility on output growth or of output growth on its volatility. |