Declining output volatility in Germany: impulses, propagation, and the role of monetary policy

The decline in output volatility in Germany is analysed. A lower level of variance in an autoregressive model of output growth can be either due to a change in the structure of the economy (a change in the propagation mechanism) or a reduced error term variance (reduced impulses). In Germany the decline output volatility is due to a decline in the persistence of the growth process. This is in contrast to the US results, where a break in the variance seems to dominate the decline in persistence. A change in the conduct of monetary policy (the establishment of another monetary policy regime) could be part of an explanation for the change in propagation. Stochastic simulations with a New Keynesian DSGE model support the hypothesis.