Economic growth,volatility, and cross-country spillovers: New evidence for the G7 countries

This study examines the linkages between output growth and output volatility in the G7 countries over the period 1958M2–2013M8. Using the VAR-based spillover index approach by Diebold and Yilmaz (2012) we find that: i) output growth and volatility are highly intertwined; ii) spillovers have reached unprecedented levels during the global financial crisis; and iii) the US has been the largest transmitter of growth and volatility shocks. Generalized impulse response analyses suggest moderate growth spillovers and sizable volatility spillovers across countries. Cross-variable effects indicate that volatility shocks lead to lower growth, while growth shocks reduce output volatility.     

Output volatility and economic growth

This paper proposes a new instrument to identify the causal effect of output volatility on economic growth, which is based on (exogenous) volatility spillovers from abroad. Cross-section evidence from 128 countries points to a negative effect of volatility on growth.     

An empirical analysis of the US stock market and output growth volatility spillover effects on three Anglo-Saxon countries

This paper examines the dynamic and switching effects of volatility spillovers arising from US stock market returns and GDP growth on those of Australia, Canada and the UK. For this purpose, we use quarterly data (1961q1–2013q1) and a constant probability Markov regime switching model. We found that the US stock market volatility significantly affects the stock market volatility of all three countries at least in one of the two specified regimes over time. However, the stock market volatilities in none of the three countries are contemporaneously influenced by the US output volatility even after allowing for two distinct regimes. On the other hand, the US stock market volatility exerts significant influences on the output volatilities of both Australia and the UK. Compared with Australia and the UK, Canada and the US show substantial output volatility co-movements, thereby confirming the close association between the two neighbouring economies through the NAFTA (North American Free Trade Agreement). We conclude that shocks emanating from the US stock market have unequivocal flow-on effects on the output and return volatilities of the other economies.     

Exploring GDP growth volatility spillovers across countries

This study takes a portfolio approach to investigate GDP growth volatility spillovers among 120 countries of the world during the 1960–2017 period. Based on the ratios of growth rate to standard deviation, we rank these countries in pools of high-, midsize-, and low-income growth. Using a spillover index that is based on variance decompositions under a vector autoregressive framework, we analyze the sources of growth volatility dynamics in the world in terms of volatility proportions from and to others. We find that high-income growth countries are net transmitters, while low-income growth countries are net recipients of growth volatility. We also find that it takes several years for low-income growth countries to absorb growth shocks of global nature. Overall, our analyses illustrate the importance of partnership in risk sharing as it is related to portfolio strategies and risk management.     

Output dynamics of the G7 countries--stochastic trends and cyclical movements

Using a time series framework, the paper studies the interactions of the annual real per capita GDP data of the G7 countries. Evidence is found of six common nonstationary processes behind the international output dynamics. In addition, there is evidence for the existence of a common business cycle among these countries. The trend and cycle components of each output series are obtained with a procedure that accounts for the presence of both the common nonstationary and cyclical factors. It is found that the relative variability and the correlation of the trend and cycle components are not similar across the G7 countries.     

Output volatility in Australia

A number of papers have documented a significant decline in real GDP volatility in several major OECD economies. Some authors have presented evidence to suggest that this is the outcome of a one-off structural break from a high to low volatility state whilst others have estimated regime switching models that indicate low volatility regime states have dominated in recent years. This article provides further evidence on the general properties of output volatility for Australia, including evidence of a significant moderation in output volatility for the country that occurred in the early 1980s. Estimates of various GARCH models of real GDP growth are also provided to further examine shorter term volatility features of the Australian economy that are associated with its business-cycle. A regime shift dummy is maintained in all models of the conditional variance in order to account for the regime shift in volatility and evidence is found of significant business-cycle effects, including leverage effects and asymmetries that suggest recessions are times of higher output volatility than economic expansions. Overall, it is concluded that the so-called ‘Great Moderation’ in macroeconomic instability, as documented here for Australia, is a result of a myriad of economic, institutional and policymaking changes.     

Long-run growth and volatility: which source really matters?

The aim of the article is to analyse the relationship between long-run growth and business cycle volatility. In particular, the main purpose of this article is to identify which source of volatility is most detrimental to growth. Using cross-country data from 1970 to 2000, and several indicators of volatility (such as inflation, exchange rate, government expenditure, output and investment volatility) this article shows that although, all these measures of volatility are remarkably harmful for growth, business cycle investment volatility is the main source that hampers long-run growth. This relation is robust to different measures of business cycle, and to different sub-samples of countries.     

Accounting for Growth and Output Gaps: Evidence from New Zealand

We evaluate New Zealand's macroeconomic performance over the 1967–1996 period, which witnessed numerous economic reforms. Using both index–number and econometric techniques, we decompose nominal GDP growth and the output gap into contributions from price level changes, productivity growth and changes in factor utilisation. Changes in domestic prices accounted for four–fifths of the growth in nominal GDP, while capital accumulation and employment growth were the most important factors determining real–output growth. Deviations in the domestic price level around its long–run trend contributed most heavily to changes in the nominal output gap. The real gap was influenced in any year variously by deviations of the terms of trade and labour input from their long–run trends, as well as by productivity shocks.     

Evidence on inflation–output trade-off in developing and industrial countries

This paper subjects Lucas's output–inflation trade-off study to further empirical investigation. The cross-country study divides the 111 countries covered into 90 developing countries and 21 advanced countries. Lucas's proposition is that volatility of aggregate demand growth should reduce the impact of aggregate demand growth on the cyclical output and the implication of this is that there is no output–inflation trade-off in line with the natural rate theory. We employ annual data over periods that fall between 1958 and 1985 in order to conduct the test. Our findings suggest that Lucas's proposition is valid for developed economies but not for developing economies.     

The link between output growth and volatility: Evidence from a GARCH model with panel data

Estimation results from a dynamic panel GARCH model for G7 countries over the 1965–2007 period support that higher output growth is associated with higher volatility of the innovations to growth, but higher growth does not lead to more economic uncertainty.     

The behaviour of relative prices in the European Union: A sectoral analysis

Using multivariate unit root test methods, this paper investigates the Purchasing Power Parity (PPP) hypothesis at the sectoral level across six European countries over the last 17 years. Evidence of mean reversion towards PPP is found for the relative prices of some sectors and countries. Mean reversion in relative prices is explained by cross-country and cross-sectoral characteristics such as the distance between countries, nominal exchange rate volatility, differences in GDP per capita, non-tariff barriers, research and development, advertising, industrial concentration and tradeability of the products.     

Does the version of the Penn World Tables matter? An analysis of the relationship between growth and volatility

Abstract .  The Penn World Tables (PWT) are an important data source for cross-country comparisons in economics. The PWT have undergone several revisions over time. This paper documents how countries' output growth rates change across four publicly available versions of the PWT. We show that for some countries the magnitude of the differences is significant and/or the sign of the growth rates changes across versions. Using as an example Ramey and Ramey (1995) , who found growth volatility has a significant negative effect on growth, we demonstrate that conclusions based on one version of the PWT may not hold under another version.     

R&D Spillovers and Growth: Specialization Matters

We explore the relationship between openness and growth by taking a closer look at trade‐related knowledge spillovers at the industry level. First, we estimate the relation between sectoral R&D expenditures, trade‐related spillovers, and growth. Next, we incorporate these R&D linkages in a computable general‐equilibrium model for the world economy. We simulate trade liberalization in the model with R&D spillovers and compare the effects on GDP in different regions with a non‐R&D‐based model simulation. We find that the GDP effects of trade liberalization are magnified considerably by R&D spillovers for some regions—notably Japan and Southeast Asia. In other regions, such as China, the additional GDP effects are modest. These findings can be traced back to changing specialization and import patterns.     

Financial Globalization,International Business Cycles and Consumption Risk Sharing*

In spite of two decades of financial globalization, consumption‐based indicators do not seem to signal more international risk sharing. We argue that the fraction of idiosyncratic consumption risk that gets shared among industrialized countries has actually increased considerably over the period 1980–2000 and, in particular, during the 1990s—from around 30 to more than 60 percent. However, standard consumption‐based measures of risk sharing—such as the volatility of consumption conditional on output or international consumption correlations—have been unable to detect this increase because consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialized countries since the 1980s. First, the volatility of output at business‐cycle frequencies has declined by more than has the volatility of permanent fluctuations. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Second, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated.     

CROSS-COUNTRY EVIDENCE ON OUTPUT GROWTH VOLATILITY: NONSTATIONARY VARIANCE AND GARCH MODELS

This paper revisits the issue of conditional volatility in real gross domestic product (GDP) growth rates for Canada, Germany, Italy, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the six countries became noticeably less volatile over the past few decades. In this paper, we employ the modified iterated cumulative sum of squares (ICSS) algorithm to detect structural change in the variance of output growth. One structural break exists in each of the six countries after identifying outliers and mean shifts in the growth rates. We then use generalized autoregressive conditional heteroskedasticity (GARCH) specifications, modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada and Japan, and disappears entirely in Germany, Italy, the United Kingdom and the United States, once we incorporate the break in the variance equation of output for the six countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary variance. Moreover, we also consider the possible effects of our more correct measure of output volatility on output growth as well as the reverse effect of output growth on its volatility. The conditional standard deviation possesses no statistical significance in all countries, except a significant negative effect in Japan. The lagged growth rate of output produces significant negative and positive effects on the conditional variances in Germany and Japan, respectively. No significant effects exist in Canada, Italy, the United Kingdom, and the United States.     

Political institutions and economic volatility

We examine the effect of political ‘institutions’ on economic growth volatility, using data from more than 100 countries over the period 1960 to 2005, taking into account various control variables as suggested in previous studies. Our indicator of volatility is the relative standard deviation of the growth rate of GDP per capita. The results of a dynamic panel model indicate that democracy reduces economic volatility. We also find that some dimensions of political instability and policy uncertainty increase economic volatility.     

Free Trade, Growth, and Convergence

Can trade liberalization have a permanent affect on output levels, and more important, does it have an impact on steady-state growth rates? The model emphasizes the role that knowledge spillovers emanating from heightened trade can have on income convergence and growth rates during transition and over the long run. Among the results of the model, unilateral liberalization by one country reduces the income gap between the liberalizing country and other, wealthier countries. From the long-run growth perspective, unilateral (and multilateral) liberalization generates a positive impact on the steady-state growth of all the trading countries.     

Economic Distance and Cross-Country Spillovers

Rates of long-run economic growth are not independent across countries. To account for this dependence we decompose the spatial covariance function of growth rates into a function of each countrys own observable characteristics, its unobservable characteristics, and cross-country spillovers. We use original data on economic distance to structure observed variation in countries long term growth rates. We use this structure to estimate the magnitude of economic interdependence among nations, and to give a nonparametric characterization of the relationship between economic distance and the magnitude of cross-country spillovers. These spillovers turn out to be quite important, accounting for more of the spatial covariance in growth rates than unobservable variables, and by some measures rivalling the importance of the countrys own observable characteristics.     

International Transmission of Technology and Trade: The Role of Cross-country Heterogeneity

In the framework where the channel of international transmission of technology is trade in intermediate inputs, this paper investigates the role of heterogeneities across countries. In particular, this paper analyzes how cross-country differences in production structure, national innovative capacity, and absorptive capacity affect the scope and magnitude of international R&D spillovers on productivity. The study is based on the industry-level data set that covers eight OECD countries from 1970 to 1995. It finds that accounting for cross-country differences in each of production structure (using country-specific input–output relations) and national innovative capacity (using patents granted per R&D investment) yields significantly different spillover effects than previous studies. This suggests that the effect of international R&D spillovers depends on both production structure and the pattern of international trade. Further, it finds the absorptive capacity of a country is positively related to spillovers.     

Policy modeling on the GDP spillovers of carbon abatement policies between China and the United States

This paper simulates the GDP spillover effects between China and U.S. caused by the implementation of different climate protection policies. It is based on a combination of several climate protection models, which are the State-contingent Model and the Demeter Model, and the GDP Spillovers Model, known as the Mundell–Fleming model. From the simulation results, it is concluded that whether the United States implements policies on increasing carbon sink or not makes very little difference on the total output in the U.S. and the GDP spillovers toward China. However, the spillover impact of American carbon abatement policies on China experiences a varying trend that rises from negative to positive. These simulation results show that the climate protection policies of one country will have positive impact on the GDP spillovers of another country in the long term. This paper is focused on two conditions while simulating the GDP for both China and the U.S. Condition A within the simulations ignores the impact of GDP spillovers of foreign countries, while condition B takes the impact of GDP spillovers of foreign countries into consideration. Furthermore, this paper presents the simulated GDP of China and the U.S. under different scenarios and analyzes the level of GDP spillovers between the two countries. This paper concludes that carbon abatement policies in the U.S. have a larger and more noticeable GDP spillover effects to China.