Alternative characterization of the volatility in the growth rate of real GDP

Abstract

This paper has investigated an alternative characterization of the volatility in the growth rate of real GDP for Japan, UK and USA. A regime-switching approach has been explored to model the volatility process in the growth rate of real GDP. It has been motivated by recent evidence of change in the variance in GDP growth rate [Am. Econ. Rev. 90 (2000) 1464]. Using a Markov switching specification with two states, it is found that the model does a credible job in capturing the different episodes. The residual diagnostics are all supportive of the proposed specification. The economic intuition behind different volatility regimes is also given in addition to the slightly different behavior of these three OECD members.