The decline in German output volatility: a Bayesian analysis

Abstract

Using Bayesian methods, we analyze whether a volatility reduction as documented for growth of U.S. gross domestic product (GDP) in the mid-1980s can also be detected for German GDP growth. Our analysis is based on different time series models allowing for alternative characterizations of output stabilization. Across all models we find empirical evidence for a decline in the output volatility around 1993. Furthermore, we assess competing explanations for reduced output volatility. Our empirical results suggest that the main source for the volatility reduction is an ongoing structural shift accelerated by the German reunification and accompanied by changes in the correlation structure between individual GDP components.