What Explains Output Volatility? Evidence from the G3

This paper investigates the short-run and long-run impact of the determinants of output volatility for the G3 during the period 1974-2009. We estimate a multivariate GARCH model and include the covariances of those determinants, which have been ignored in the prior relevant literature. Our findings indicate that nominal variability, namely variability in the interest rate and inflation, explains output volatility. Fiscal policy variations, captured by the volatility of government spending, are found to be important as well. Fluctuations in the international markets seem to affect significantly the volatility of output in almost all countries under examination. Finally, any real shock originated from the world’s most advanced country, the U.S., transcends to the other two with high significance.