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Licensed Unlicensed Requires Authentication Published by De Gruyter September 22, 2009

Regime Switches in GDP Growth and Volatility: Some International Evidence and Implications for Modeling Business Cycles

  • Penelope Smith and Peter M Summers

This paper presents additional evidence on the international nature of the “Great Moderation:" the apparent structural decline in the variance of GDP growth first documented in the United States. We find evidence of a similar reduction in volatility in the other G-7 countries and Australia. However, the timing and nature of the moderation varies considerably across countries.We also assess whether and how business cycles have changed in the period since the Great Moderation. Our results suggest that in most of these countries, the major change in business cycles has been a noticeably slower rate of GDP growth in expansions. We find little evidence of milder recessions in the post-Moderation period. Although a lower variance of growth will result in longer expansions and rarer recessions, the evidence presented here suggests that recessions have been just as severe, on average, when they do occur.

Published Online: 2009-9-22

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