An empirical refinement of the relationship between growth and volatility

Jeffrey A. Edwards and Benhua Yang

Applied Economics, 2009, vol. 41, issue 11, pages 1331-1343

Abstract: The link between business cycle volatility and the long-run growth rate has received increasing attention in the literature over the last ten years. Yet neither is there a theoretical consensus nor consistent empirical evidence that would lead us to believe the relationship is positive, negative or nonexistent either within broadly defined regions or over time. This study investigates a possible cause for this phenomenon. What we find is that out of 14 popularly defined sub regions, only 7 can be constrained over time within the respective sub region, while only two broadly-defined regional classifications are justified. We did find that the grouping of OECD countries is statistically valid, but only if the relationship is allowed to vary over time. We suggest a refinement of the current empirical work that takes into account both more narrowly defined regional and time parametric heterogeneity.

Date: 2009
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