On the link between volatility and growth

A model of growth with endogenous innovation and distortionary taxes is presented. Since innovation is the only source of volatility, any variable that influences innovation directly affects volatility and growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels differ in their volatility and growth process. We obtain analytical measures of macro volatility based on cyclical output and on output growth rates for plausible parametric restrictions. This analysis implies that controls for taxes should be included in the standard growth-volatility regressions. Our estimates show that the conventional Ramey–Ramey coefficient is affected sizeably. In addition, tax levels do indeed appear to affect volatility in our empirical application.     

Regional output growth synchronisation with the Euro Area

This paper investigates the patterns and determinants of the co-movement of economic activity between regions in the European Union and the Euro Area. We use a panel dataset of 208 regions over the period 1989–2002 and estimate a system of simultaneous equations to analyse the impact of regional trade integration, industry specialisation and exchange rate volatility on regional output growth synchronisation with the Euro Area. We find that deeper trade integration with the Euro Area had a strong direct positive effect on the synchronisation of regional output growth with the Euro Area. Industrial specialisation and exchange rate volatility were sources of cyclical divergence. Industrial specialisation had however an indirect positive effect on regional output growth synchronisation via its positive effect on trade integration, while exchange rate volatility had an indirect additional negative effect on regional output growth synchronisation by reducing trade integration.     

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.     

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.     

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.     

The effect of output growth volatility on output growth: empirical evidence from Turkey

This article assesses the effect of output growth volatility on output growth within a stochastic-volatility-in-mean model with a time-varying framework for an open small economy: Turkey. Until now, the empirical evidence on industrial production mainly reveals that this relationship is negative. However, in further examining different sectors and sub-sectors of industrial production, we find the sign of the relationship changes depending on the sector. Moreover, there is limited evidence that the sign of the relationship changes over time. Thus, the evidence reveals that the nature of the output growth volatility–output growth relationship is not uniform across sectors.     

Volatility and firm growth

A growing body of macroeconomic evidence suggests that volatility is detrimental for economic growth. The channel through which this materializes, however, is less clear. Moreover, substantive evidence based on disaggregate data is scarce. In this paper, we provide empirical support for this relationship using a detailed cross-country firm-level dataset. We also provide additional evidence that institutional obstacles magnify the adverse effect of perceived volatility on firm growth.      

Financial structure on growth and volatility

By applying the pooled mean group estimator to a large panel up to 40 countries over the 1960–2009 period, this study finds that financial structure is significantly cointegrated to both economic growth and its volatility. In particular, the relationship is positive in nature, suggesting that more market-based countries enjoy faster economic growth but suffer more from economic fluctuations in the long run. Accordingly, in sharp contrast to the existing evidences, we conclude that the architecture of an economy's financial system matters for real sector performance. Moreover, the findings are robust to a variety of sensitivity checks, including the problem of endogeneity, the use of different financial structure (and growth volatility) indicators, the inclusion of extra growth (volatility) determinants, and the control of cross-sectional dependence in the panel data.     

Policy volatility and growth

The paper aims to examine how fiscal and monetary volatility might affect the balanced economic growth rate using a standard monetary growth model characterized by nominal wage rigidity and productive public spending. The model shows that any type of shock — monetary or fiscal — can generate either a negative or positive relationship between short-run volatility and long-run growth, critically depending on the size of government and the elasticity of output with respect to labor/capital. In particular, given the labor income share, it shows that excessive government spending may cause the impact of fiscal volatility on long-run growth to turn from positive to negative. In addition, a rise in the volatility of the monetary shock is capable of generating either an increase or decrease in the mean of growth. With the range of the labor share values in reality, the model produces results consistent with the fact that the relationship between volatility and growth is generally found empirically to be more negative in developing than in developed countries. The model can be seen as a further explanation for the ambiguous empirical evidence in the existing literature.     

Private information, money, and growth: Indeterminacy, fluctuations, and the Mundell-Tobin effect

We introduce an informational asymmetry into an otherwise standard monetary growth model and examine its implications for the determinacy of equilibrium, for endogenous economic volatility, and for the relationship between steady-state output and the rate of money growth. Some empirical evidence suggests that, for economies with low initial inflation rates, permanent increases in the money growth rate raise long-run output levels. This relationship is reversed for economies with high initial inflation rates. Our model predicts this pattern. Moreover, in economies with high enough rates of inflation, credit rationing emerges, monetary equilibria become indeterminate, and endogenous economic volatility arises.     

Military spending and economic growth in China: a regime-switching analysis

This article investigates the impact of military spending changes on economic growth in China over the period 1953 to 2010. Using two-state Markov-switching specifications, the results suggest that the relationship between military spending changes and economic growth is state dependent. Specifically, the results show that military spending changes affect the economic growth negatively during a slower growth–higher variance state, while positively within a faster growth–lower variance one. It is also demonstrated that military spending changes contain information about the growth transition probabilities. As a policy tool, the results indicate that increases in military spending can be detrimental to growth during slower growth–higher growth volatility periods.     

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.     

The Role of Productivity and Financial Frictions in the Business Cycles of a Small Open Economy: Hong Kong 1984–2011

This paper analyzes the business cycle properties of the Hong Kong economy during the 1984–2011 period, which includes the financial crisis experienced in 1997/98 and the economic crisis of 2008–2010. We show that the volatility respectively, of output, of the growth rate of output and of real interest rates in Hong Kong are higher than the corresponding average volatility among developed economies. Furthermore, interest rates are countercyclical. We build a stochastic neoclassical small open‐economy model estimated with a Bayesian likelihood approach that seeks to replicate the main business cycle characteristics of Hong Kong, and through which we try to quantify the role played by exogenous total factor productivity (TFP) shocks (transitory and permanent), real interest rate shocks and financial frictions. The main finding is that financial frictions, jointly with the assumption that the country spread is endogenous, seem important in explaining the countercyclicality of the real interest rates.     

Corruption,growth, and growth volatility

While the existing studies focus on the corruption–growth relationship, this paper introduces a new focus involving corruption and growth volatility. The Ehrlich–Lui (1999) framework provides the theoretical background of the paper, which produces testable hypotheses regarding the corruption–growth and the corruption–growth volatility relationship. The cross-section dataset that is used in the empirical analysis contains 121 developed and developing countries. In terms of the relationship between the governance-related variables and growth rates, only corruption control and government effectiveness significantly and adversely affect the average growth rate. Regarding the relationship between growth volatility and governance-related variables, the results suggest that higher corruption control, expropriation risk control, government effectiveness, and government consumption decrease growth volatility.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.     

Business cycles in a two-sector model of endogenous growth

Summary. This paper analyzes the impact of cyclical volatility on long-term economic growth: does growth increase or decrease with increased cyclical volatility? We construct a stochastic two-sector model of endogenous growth to analyze this question in detail. We will show that economic growth is higher in the presence of business cycles, since people devote more time to learning activities in an uncertain economic environment. Human capital is a hedge against future income uncertainty. Hence, the rate of economic growth will be higher in a stochastic environment. Based on a calibration of the model, we find that economic growth increases by 0.46%-point as a result of observed business cycle variability. When account is taken of the interaction between the model's general equilibrium and the cycle, welfare gains (measured in units of a permanent percentage increase in consumption) from eliminating business cycle volatility are approximately 1.87%. Received: January 25, 2000; revised version: November 3, 2000     

Declining output growth volatility: A sectoral decomposition

A decomposition of the U.S. aggregate output growth volatility using two-digit industry-level data shows that more than 60% of the post-1983 reduction in aggregate output growth volatility is attributed to the lowered comovement in total factor productivity (TFP) growth between industries. In contrast, stabilized input and TFP growths within an industry contribute little.     

The effect of growth volatility on income inequality

This paper assesses the long-run effect of growth volatility on income inequality using a comprehensive panel of annual U.S. state-level data during the 1945 to 2004 period. Using the pooled mean group (PMG) estimator, we find evidence supporting the hypothesis that larger growth volatility positively and significantly associates with higher income inequality. Our key finding is robust to alternative lag structures, conditioning variables, inequality measures, volatility indicators, time periods, and panel estimators. Our key finding does change for asymmetric effects, where larger growth volatility positively and significantly associates with higher income inequality only for positive economic growth. The volatility effect proves positive, but insignificant, for negative economic growth.     

Volatility and growth: Governments are key

There exists a persistent disagreement in the literature over the effect of business cycles on economic growth. This paper offers a solution to this disagreement, suggesting that volatility carries not only a positive direct effect, but also a negative indirect effect, operating through the insurance mechanism of government size. Theoretically, the net growth effect of volatility is then ambiguous. The paper reveals the underlying endogeneity of government size in a balanced panel of 90 countries from 1961 to 2010. In practice, the negative indirect channel dominates in democracies, but with less power to choose public services in autocratic regimes the positive direct effect takes over. Consequently, volatile growth rates are detrimental to growth in democracies, but beneficial to growth in autocracies. The empirical results suggest that a one standard deviation increase of volatility lowers growth by up to 0.52 percentage points in a democracy, but raises growth by 1.66 percentage points in a total autocracy. These findings point to a crucial intermediating role of governments in the relationship between volatility and growth. Both the size of the public sector and the regime form assume key roles.     

The end of Brazilian big inflation: lessons to monetary policy from a standard New Keynesian model

The paper analyzes economic stabilization in Brazil in the context of a New Keynesian model estimated with Bayesian techniques. Dataset covers the period 1975–2012. Our methodology is based on tests for multiple structural breaks at unknown dates and counterfactual exercises. The results show that inflation and output volatility present an inverted U-shape pattern, peaking at the 1985–1994 sample. Changes in the monetary policy stance and milder shocks accounted for the reduced inflationary volatility (about 50% each, in some specifications). However, some assumptions indicated that a sharp decline in the Phillips curve slope was also important for controlling inflation. Concerning to output, the sole explanation for its volatility fall seemed to be smaller shocks. Therefore, we conclude that a mix of the “good luck” and “good policy” hypotheses mainly originated the current period of increased stability in the country.