A Monthly Volatility Index for the US Real Economy

27 Pages Posted: 25 Mar 2008 Last revised: 2 Feb 2009

See all articles by Cecilia Frale

Cecilia Frale

Government of the Italian Republic (Italy) - Department of the Treasury

David Veredas

Vlerick Business School

Date Written: February 2009

Abstract

We estimate the monthly volatility of the US economy from 1959 to 2008 by extending the factor model of Stock and Watson (1991). The volatility of the factor, which we call VOLINX, has three applications.First, it measures the changes in uncertainty in the economy. VOLINX captures the decrease in the volatility in the mid-80s (the so-called Great Moderation) as well as the different episodes of uncertainty over the sample period. In the 70s and early 80s the stagflation and the two oil crises marked the pace of the volatility whereas 09/11 is the most relevant shock after the moderation. Second, it helps to understand the macroeconomic indicators that cause volatility. While industrial production is one of the main drivers of the growth rate of the economy, its volatility is mainly affected by employment and income. Last, the methodology we use permits us to estimate monthly GDP, which has conditional volatility that is partly explained by VOLINX.

Keywords: Great Moderation, temporal disaggregation, volatility, dynamic factor models, Kalman filter

JEL Classification: C32, C51, E32, E37

Suggested Citation

Frale, Cecilia and Veredas, David, A Monthly Volatility Index for the US Real Economy (February 2009). Available at SSRN: https://ssrn.com/abstract=1112629 or http://dx.doi.org/10.2139/ssrn.1112629

Cecilia Frale

Government of the Italian Republic (Italy) - Department of the Treasury ( email )

Via XX Settembre, 87
Rome, 00197
Italy

David Veredas (Contact Author)

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

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