On the estimation of the volatility-growth link
AbstractIt is common practice to estimate the volatility-growth link by specifying a standard growth equation such that the variance of the error term appears as an explanatory variable in this growth equation. The variance in turn is modelled by a second equation. Hardly any of existing applications of this framework includes exogenous controls in this second variance equation. Our theoretical ?ndings suggest that the absence of relevant explanatory variables in the variance equation leads to a biased and inconsistent estimate of the volatility-growth link. Our simulations show that this effect is large. Once the appropriate controls are included in the variance equation consistency is restored. In short, we suggest that the variance equation must include relevant control variables to estimate the volatility-growth link.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-21.
Date of creation: 30 Apr 2012
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volatility and growth; growth regression; endogenous variance unbiased estimates.;
Other versions of this item:
- Andrey LAUNOV & Olaf POSCH & Klaus WÄLDE, 2012. "On the estimation of the volatility-growth link," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2012009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Wälde, Klaus & Launov, Andrey & Posch, Olaf, 2013. "On the estimation of the volatility-growth link," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79835, Verein für Socialpolitik / German Economic Association.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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