The Recent Increase in the Volatility of Economic Indicators

By Fee, Kyle; Occhino, Filippo | Economic Trends, March 2009 | Go to article overview

The Recent Increase in the Volatility of Economic Indicators


Fee, Kyle, Occhino, Filippo, Economic Trends


02.27.09

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In recent months, we have seen a staggering increase in stock market volatility. One popular measure of market volatility, the Chicago Board Options Exchange's Volatility Index (VIX), jumped to 62.6 in November 2008, higher than it's ever been. The VIX is computed from the S&P500 stock index option prices, and higher numbers imply that investors expect more volatile movements in the S&P index in the near term. (Numbers correspond to the annualized percentage point change expected over the next 30 days). The index has since dropped to 44.7 for January 2009, but this is still very high.

Is there a corresponding increase in volatility of macroeconomic variables? To answer this question, we focused on four main economic indicators, GDP growth, employment growth, productivity growth, and inflation. We obtained their volatilities by calculating their deviations from long-run trends. When an indicator is far from its long-run trend, regardless of whether it is above or below, its volatility is higher. More precisely, we computed the current volatility of an indicator as a weighted average of its past volatility and its deviation from its historic mean (in the case of GDP, employment, and productivity) or its two-year moving average (in the case of inflation).

Plotting the growth rate of GDP and its volatility from 1950 to the present, we can easily see what is commonly referred to as the "great moderation," the long-run decrease in the volatility of GDP growth (and other variables) that started in the 1980s. Averaging 2.0 percent during the 19501984 period, the volatility of GDP growth fell to 0.9 percent after 1984. A variety of explanations for the great moderation have been proposed, including a change in the structure of the economy due to advances in information technology, increased resilience of the economy to oil shocks, increased access to financial markets, changes in financial market regulation, improvements in the conduct of monetary policy, a reduction in the size of domestic and international shocks (see "Why has output become less volatile" and "The Great Moderation: Good Luck, Good Policy, or Less Oil Dependence?").

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Our graph shows that the volatility of GDP growth has increased during the current recession. However, volatility also increased during the 1991 and 2001 recessions. …

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