Different measures of volatility: the hypothesis of output composition in Portugal

Different measures of volatility: the hypothesis of output composition in Portugal

 

José Alberto Fuinhas , Antonio Cardoso Marques

 

Keywords: macroeconomic volatility, output composition effect, correlation effect

 

Summary: This paper focuses on analyzing the impact of the consequences of monetary union on GDP volatility in Portugal. Using quarterly data from 1978:01 to 2009:04, we test the output composition effect and the correlation effect through three alternative approaches of volatility: year on year, quarter on quarter and the value of output gap. Results support the presence of the composition effect. Overall, the average covariance has played a relevant role in lowering volatility. Evidence also indicates that there is a regime shift near the years 1992-3, while both European Union membership and participation in the euro area contribute towards smoothing the economy. The decreasing path of volatility was slightly reversed after the country became a euro area member.

 

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