Stabilising output growth fluctuations is a primary objective of both monetary and fiscal policy. Typically, these policies involve dampening business cycle fluctuations. However, should a significant proportion of output growth volatility be motivated by forces outside business cycle frequencies, policymakers may need to reconsider their former propensity to look within the business cycle when identifying the source and nature of output fluctuations. This thesis explores the nature of output growth volatility across a sample of advanced and developing countries.
Through the use of spectral density analysis, quarterly GDP growth series are decomposed into high, business cycle, and low frequency bands. Furthermore, this thesis qualitatively assesses how the choice of growth rate and seasonal adjustment technique will affect the shape of the output growth spectrums. This assessment is necessary in order to increase the validity of the interpretations of spectral shapes. Through this assessment, it is found that the choice of growth rate significantly affects the shape of the resulting spectrum. When Y-0-Y growth rates are used, the majority of the power of the spectrum appears at both business cycle and long-run frequencies. Conversely, Q-O-Q growth rates produce spectrums with the majority of volatility of the series falling at high frequencies. Although both growth rates produce conflicting results, they also suggest that a significant proportion of output growth volatility stems from fluctuations outside of business cycle frequencies. Furthermore, this thesis' findings indicate that the choice of seasonal adjustment technique has a negligible effect on the shape of the Y-O-Y output growth spectrums. However, the choice of seasonal adjustment techniques can affect the shape of Q-O-Q growth rate spectrums.
Subsequently, empirical tests are used to ascertain whether any correlation exists between the proportion of volatility in the long-rum component of output growth and a country's income, trade and financial openness, and degree of policy constraint. Although a negative correlation is found for income level using Y-O-Y growth rates and openness to trade using Q-O-Q growth rates, these results are not robust to measurement errors and the choice of growth rates.