The volatility of the output gap in the G7

Pub. Date
13 May, 2004
Pub. Type

The decline in output volatility in the US has been variously ascribed to changes in the policy regime reflected in inflation volatility, improved stockholding and increased international integration. We investigate output volatility in the G7 in a panel context treating these as competing explanations. We show that an encompassing panel has a significant role for both net financial wealth and trade openness. There is also a role for inflation volatility, even though previous studies have ignored the fact that it may be endogenous and its role therefore spurious. However, its importance clearly varies over time and across countries, and it appears less important as an explanation of declining volatility in the US than it does in the UK. Changes in openness appear to be at least as important in explaining the decline in US output volatility.