Macroeconomic Volatility, Predictability, and Uncertainty in the Great Moderation

Sean D. Campbell

80 citations0/0 files storedJournal of Business and Economic Statistics

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Market Dynamics and Volatility

Abstract

I examine the extent to which the large decline in observed real output volatility, that is, the great moderation, can be attributed to changes in macroeconomic uncertainty and macroeconomic predictability using forecasts of future real output growth from the Survey of Professional Forecasters (SPF). The results indicate that both predictability and uncertainty have declined over the great moderation. The results indicate that measuring the decline in macroeconomic uncertainty with the volatility of shocks from a fixed-parameter autoregressive model overstates the decline in uncertainty by between 20% and 25%. I examine how this overstatement affects predictions of the equity premium in the consumption capital asset pricing model (CCAPM), and I relate the decline in predictability to a significant change in the relationship between SPF forecasts and key measures of current macroeconomic performance.

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References

1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1994Comparing Predictive Accuracy 1999By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior 2000What is an Oil Shock?2001Consumption, Aggregate Wealth, and Expected Stock Returns n.d.Output Fluctuations in the United States: What Has Changed since the Early 1980's?1989New Indexes of Coincident and Leading Economic Indicators 2002Has the Business Cycle Changed and Why?

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