Output Growth and Output Variability: Quantifying Connections and Tradeoffs

We study the historical trends in the coverage of the related topics growth and stability in the field of macroeconomics. It is argued that over the past 25 years research on growth has quantitatively dominated research on output variability. The article seeks to make a contribution to an integrated study of output growth and output volatility. This integration builds on ideas proposed by Fischer Black. We clarify Black’s contribution and show that the variability of output depends on the level of output as well as on the growth rate of output. The study then focuses on the experience of OECD countries since 1970. Based on statistical estimates we document the minimal (or efficient) level of output variability that a country could have achieved over the last four decades. This normative benchmark is similar to the notion of a tradeoff between portfolio return and portfolio variance known from the field of finance. A country’s excessive level of output variability suggests necessary improvements in the design of stabilization and regulation policies. The international comparison of countries based on this approach indicates that many (although not all) of the high growth economies have experienced output variability significantly above the efficient level.