What Drives Output Volatility? The Role of Demographics and Government Size Revisited

Abstract

AbstractThis paper studies the determinants of output volatility in a panel of 22 OECD countries. In contrast to the existing literature, we avoid ad hoc estimates of volatility based on rolling windows, and we account for possible non‐stationarity. Specifically, output volatility is modelled within an unobserved components model where the volatility series is the outcome of both macroeconomic determinants and a latent integrated process. A Bayesian model selection approach tests for the presence of the non‐stationary component. The results point to demographics and government size as important determinants of macroeconomic (in)stability. A larger share of prime‐age workers is associated with lower output volatility, while higher public expenditure increases volatility.