Wavelet Variance Analysis of Output in G-7 Countries

Abstract

The large decline in output volatility experienced by most industrialized countries in the last decades has been thoroughly analyzed using standard time and frequency domain methods. In this paper we investigate the issue of moderation of volatility in G-7 economies and its sources, applying a multi-scaling approach to the industrial production indices of G-7 countries between 1961:1-2006:10. Using the MODWT estimates of wavelet variance we provide a scale-based analysis of variance that allows us to characterize the decline in volatility and to detect the importance of the various explanations of the moderation. The main scale-by-scale results stemming from multi scale analysis of variance are: i) a reduction in volatility which, although displayed by all the G-7 countries, is not uniform across time scales (as the decline is larger at short-term scales than at business cycle scales for France and Italy, and quite uniform across scale for the UK and the US) nor countries (as the decline is significant for a subset of countries only, i.e. France, Italy, the UK and the US); and ii) the moderation has to be attributable to the decline in the variance of both common (in the 1970s) and country-specific (in the 1960s) exogenous disturbances hitting the economy.