Volatility and growth: a not so straightforward relationship

Abstract

Conflicting theoretical models and diverse empirical evidence characterize research analysing the relationship between business cycle volatility and economic growth. While the average reported effect of volatility on growth is negative, the empirical estimates vary substantially across studies. We identify the factors that explain this heterogeneity in estimates by conducting a meta-analysis. Our evidence suggests that researchers’ choices regarding the measure of volatility, the control set of the estimated equation, the estimation methods, and the data characteristics can all explain the differences in the reported estimates. Finally, the literature is found to be free of publication bias.

Examining GDP Growth and Its Volatility: An Episodic Approach

“…The theoretical literature highlights both positive [ 8 , 9 ] and negative [ 10 , 11 , 12 ] relationships between volatility and economic growth. The positive interdependence between the two grew out of Schumpeter’s concept of creative destruction [ 8 ], who stated that during recessions or economic downturns, old technologies are replaced by new ones, which stimulates productivity and economic growth.…”

Is British output growth related to its uncertainty? Evidence using eight centuries of data

“…Our finding that in the low-growth regime, uncertainty has a negative effect on growth may explain why this negative effect is more prominent in low-income developing countries. Indeed, this finding may explain the evidence obtained by Bakas et al (2018) that the negative relationship is stronger for developing countries which are in low-growth regimes and have considerable bad uncertainty. Our evidence can also explain the finding of Aghion et al (2010) that countries characterized by financial underdevelopment have higher volatility which is associated with a negative impact on growth.…”

“…These models have been to the forefront of empirical macroeconomic models over the last fifteen years in modelling uncertainty in various macroeconomic variables (Hamilton, 2008). 3 Our contribution to the economics literature is three fold and may be summarized within the context of economic modelling, macroeconomic uncertainty literature and economic policy. First, we employ a very long sample 1 While previous studies have highlighted the limited evidence of economic growth prior to the 17 th century, see Crafts and Mills (2017), we examine a much larger sample of data.…”

“…The empirical evidence, to date, based on cross-sectional country studies, panel data studies or time series analyses of individual countries is also quite mixed. The conflict in relation to the theoretical models, as well as the mixed empirical findings, is summarized in Bakas et al (2018). The theoretical and empirical ambiguity surrounding the RBC variability-economic growth relationship provides us with the motivation to expand on the empirical aspects of this issue.…”

“…Secondly, we allow for regimes in the growth series and we are more likely to detect the differential effects of uncertainty on growth between low and high growth regimes. We see this as a critical innovation towards understanding the ambiguous empirical relationship between growth uncertainty and output growth that has been highlighted by Bakas et al (2018). Finally, we evaluate the extent of growth uncertainty over an eight century sample, with a particular emphasis on the phases of economic development and the industrial revolution in particular.…”