Changes in the expenditure-side volatility of New Zealand GDP

Abstract

To shed more light on whether there has been a decline in the volatility of New Zealand real GDP, I estimate and test for multiple structural breaks in the conditional mean and variance of a simple data generating process for GDP. This is done using the technology set out in Bai and Perron (1998), controlling for business-cycle non-linearities and outliers. I give more attention than previous research to the sensitivity of the results to using different measures of GDP. In particular, I extend the analysis to expenditure on GDP, for which I backdate chain-linked data to 1982. Following Buckle, Haugh and Thomson (2003) I then decompose a simple moving average and moving variance of growth in expenditure on GDP by disaggregated expenditure component, to determine whether expenditure-side volatility contributions have changed over time. Leaving aside the prolonged period of low growth in the late 1980s and early 1990s, there is no clear indication that the amplitude or persistence of the growth cycle has decreased since the 1980s. There is some visual and statistical evidence of a decline in the high-frequency volatility of production GDP in the late 1980s, but neither the significance nor the timing are robust to using expenditure on GDP or the sum of components of production GDP. Within expenditure on GDP, there is substantial measurement error, particularly in the 1980s, reflecting discrepancies between expenditure on GDP and its components, and possible measurement problems with inventory investment. The available data suggest that any reduction in the high-frequency volatility of GDP since the mid 1980s reflects changes in the behaviour of production rather than less volatile expenditure. While imports have offset the peaks and troughs of the demand cycle since the end of the 1980s, imports have not absorbed quarterly fluctuations in the demand for domestic goods and services to any material extent. Consumption demand has become less volatile over the 1990s as more of the fluctuations in total consumption of New Zealand goods and services are attributable to non-residents. Once outliers are controlled for, private investment, both in construction and in plant and machinery, is the main factor continuing to contribute to high-volatility episodes in domestic demand.