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 link between institutions, technical change and macroeconomic volatility

This paper evaluates the role of technical change as a mediating channel through which the effects of institutions trickle down to affect growth volatility. Using different samples, estimation procedures and indicators of institutions and technical change, the results show that technical change is an important stabilizing force of growth volatility and that at least part of the stabilizing force of technical change originates from strong institutions. This conclusion does not appear to be generated by weak data, simultaneity bias or measurement errors and is remarkably robust to a large number of alternative specifications.     

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.     

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.     

Scaling the volatility of GDP growth rates

The distribution of shocks to GDP growth rates is found to be exponential rather than normal. Their standard deviation scales with GDP^β where β=−0.15±0.03. These macroeconomic results place restrictions on the microeconomic structure of interactions between agents.     

The impact of the Interaction between institutional quality and aid volatility on growth: theory and evidence

We analyze both theoretically and empirically, the effect of aid volatility and its interaction effect with institutional quality on per capita economic growth. Our theoretical model, in which an aid-recipient government, operating in an institutional environment of some given quality (making choices over the distribution of aid), predicts that a negative effect of aid volatility on growth is mitigated by stronger institutional quality. We use panel data covering the period 1984–2004 for 78 countries to test this theoretical prediction. Using Generalised Methods of Moments (GMM) we find the relationship between growth and aid volatility is significantly negative and depends on institutional quality. Our baseline results are robust to various computations of aid volatility and foreign aid, time periods, sub-samples and additional covariates.     

Growth volatility and the interaction between economic and political development

Research on the effect of democracy on economic growth has not reached a definitive conclusion. Yet, research on the effect of democracy on economic growth volatility has consistently found that higher levels of democracy reduce volatility. Similarly, research has found that higher levels of economic development retard volatility. Using a novel empirical approach, this article presents evidence of an interactive effect between higher levels of democratization and economic development on growth volatility. Specifically, the marginal effect of political development on volatility is negative until countries reach per capita income levels of about $2,700, depending on the conditioning set. The marginal effect is insignificant for countries with higher levels of income. This implies that at a minimum, nearly 50% of the countries in our sample could enjoy less volatile economies with greater political development.     

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.     

Government size, composition, volatility and economic growth

This paper analyses the effects in terms of size and volatility of government revenue and spending on growth in OECD and EU countries. The results of the paper suggest that both variables are detrimental to growth. In particular, looking more closely at the effect of each component of government revenue and spending, the results point out that i) indirect taxes (size and volatility); ii) social contributions (size and volatility); iii) government consumption (size and volatility); iv) subsidies (size); and v) government investment (volatility) have a sizeable, negative and statistically significant effect on growth.     

A spatial econometric analysis of the regional growth and volatility in Europe

Based on a sample of 1,084 European regions (EU15) from 1995 to 2004, we estimate the relationship between the average growth rate of GDP per capita and the volatility of the growth rate allowing for spatial effects. The spatial lag and spatial error models show that the regional per capita growth rate and volatility are significantly positively related on average. However, the inclusion of country interaction terms reveals that the volatility impact is not uniform across countries. In particular, the relationship between growth and volatility is significantly positive for the majority of countries but significantly negative for three countries (namely Finland, Italy, and Ireland).

Examining the link between plan evaluation and implementation

The study investigates evaluation and implementation during planning — determining how evaluation and implementation tactics join to produce successful and less successful outcomes. The tactics managers, acting as plan sponsors, used to evaluate and implement were uncovered from an appraisal of planning practices found in nearly 400 projects. The findings indicate that implementation has more influence on success than evaluation. Considering social and political issues early in the planning process frames the process with implementation concerns and allows foresight, visualizing innovative ideas. When implementation tactics lead planning in this way either intervention or participation tactics are employed. Both tactics improve success dramatically. However, in three of four projects studied implementation was positioned at the end of a planning process. This concentrates on installation behaviors and employs evaluation to find arguments that support a preferred plan. The choice of implementation tactics was limited to persuasion or edict. Both are failure prone. The best evaluation tactics (analysis and participation) improve success somewhat for the best implementation tactics (intervention and participation), but do not overcome the difficulties created by implementing with persuasion or edict.     

The impact of volatility on growth in China

China’s path to emerging as the world’s second largest economy has not been a smooth one. This paper considers whether the volatility of growth has had an impact on the trend rate of growth. In doing so it aims to promote a better understanding of the determinants of China’s impressive trend rate of growth and also shed light on questions such as whether the trend rate of growth might have been even higher had the government and central bank been better able to offset volatility. Utilizing a GARCH-M model, the results of the empirical analysis suggest that the impact of volatility has been either positive or insignificant, but not negative.     

On the trade impact of nominal exchange rate volatility

What is the effect of nominal exchange rate variability on trade? I argue that the methods conventionally used to answer this perennial question are plagued by a variety of sources of systematic bias. I propose a novel approach that simultaneously addresses all of these biases, and present new estimates from a broad sample of countries from 1970 to 1997. The estimates indicate that nominal exchange rate variability has no significant impact on trade flows.     

Does exchange rate volatility hinder export growth?

The paper examines the impact of exchange rate volatility on trade using an ARCH-in-mean model. The advantages of this statistical approach vis-a-vis earlier approaches is that it provides more efficient coefficient estimates and avoids the problem of spurious regressions. Exchange rate volatility was found to have a negative impact on Canadian and Japanese exports to the United States and on Australian exports to the world. For Sweden, the United Kingdom and the Netherlands, the relationship was found to be positive. The magnitude of the impact of a 10% increase in exchange rate volatility on export volumes was found to range from a reduction of 7.4% (Canada) to an increase of 5% (Sweden). The results indicate that exports invoiced in the importer's currency are affected negatively by exchange rate volatility, and exports invoiced in the exporter's currency are affected positively. A partial equilibrium, profit maximization model is derived to support these findings.     

On volatility of prices in arbitrage-free markets

Summary This paper addresses the question of what one can learn about the dynamics of an economy from observing cross-sectional and time series variations in the volatility of prices in an arbitrage-free securities market. We introduce the notions of stochastic derivatives, marginal risk-adjusted growth rates, and marginal risk exposure in a single factor economy. We show that future variations in the state of the economy are due to two independent sources: the marginal risk-adjusted growth rate and the changes in marginal risk exposure. Using the martingale characterization of arbitrage-free prices, together with a martingale representation formula due to Haussmann (1978), we show that cross sectional variations in price volatility of assets with linear payoffs can be used to identify the sum of these two sources. Measurements of price volatility for assets with linear payoffs are not sufficient for complete identification of the independent determinants of possible future variations in the economy. However, using the volatility of prices of options on the state variable, we can identify the stochastic derivative and hence compute the price volatility of any path independent contingent claim.I am grateful to David Kreps and Kenneth Singleton for helpful conversations and to an anonymous referee for useful remarks. Financial support from Stanford Graduate School of Business Faculty Fellowship is gratefully acknowledged.     

On the interaction between public and private capital in economic growth

This paper introduces two forms of interaction between private and public capital in an endogenous growth model in which productive government expenditure takes the form of a stock-variable and public capital is used in part as an input in the production of final output and in part to increase its own supply. While the first form of interaction involves the stocks of the two capital-goods and takes place within the final output sector through the specification of the aggregate production function (Cobb?CDouglas vs. CES), the second one concerns the rates of investment in the two kinds of capital. The share of productive public expenditure devoted to output production can be either exogenous or endogenous. Our results suggest that when this share is exogenous, along the balanced growth path the optimal growth rate of the economy is a positive function of the degree of complementarity between the two forms of investment. When the share of productive public expenditure devoted to output production is endogenous, the public capital share in GDP becomes, along with the model??s preference parameters, an important determinant of the economy??s long run growth. We also find that the optimal growth rate is an increasing function of the elasticity of substitution between public and private capital inputs in goods production, and is independent of the complementarity/substitutability between the two forms of investment.     

Intraday return and volatility relationships between the Ibex 35 spot and futures markets

This paper analyses the intraday lead-lag relationships between returns and volatilities in the Ibex 35 spot and futures markets. Using hourly data, we jointly analyze the interactions between markets, estimating a bivariate error correction model with GARCH perturbations which captures stochastically the presence of an intraday U-shaped curve for both spot and futures market volatility. Our findings show a bidirectional causal relationship between market volatilities, with a positive feedback. This two-way transmission of volatility is consistent with market prices evolving according to a long-run equilibrium relationship, and shocks affecting both markets in the same direction. Our empirical results also support a unidirectional cross interaction from futures to spot market returns. This pattern suggests that the futures market leads the spot market in order to incorporate the arrival of new information.     

On the predictability of knowledge formation: The tortuous link between regional specialization trade, and development

This paper examines the relation between industrial mix, trade, and regional productivity growth. For this purpose, a dynamic model of the open economy with diversified sectoral knowledge formation and incomplete interregional knowledge diffusion is constructed. The theoretical framework is first used to show the consequences of increasing globalization on regional growth. It is then applied to German regional data in order to investigate whether there is evidence of generally specified patterns of knowledge formation. It emerges that some causal relationships are robust for the case of German regions but cannot be exploited by economic policy in general.