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On the estimation of the volatility-growth link

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  • Andrey Launov

    ()
    (University of Mainz, CESifo, and UCL Louvain la Neuve)

  • Olaf Posch

    ()
    (Aarhus University and CREATES, CESifo)

  • Klaus Wälde

    ()
    (University of Mainz, Center for Structural Estimation and University of Bristol)

Abstract

It 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 Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-21.

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Length: 8
Date of creation: 30 Apr 2012
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Handle: RePEc:aah:create:2012-21

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Web page: http://www.econ.au.dk/afn/

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Keywords: volatility and growth; growth regression; endogenous variance unbiased estimates.;

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  1. Olaf Posch, 2006. "Explaining Output Volatility: the Case of Taxation," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 20608, Hamburg University, Department of Economics.
  2. Olaf Posch & Klaus Wälde, 2011. "On the link between volatility and growth," Journal of Economic Growth, Springer, Springer, vol. 16(4), pages 285-308, December.
  3. Natalia Ponomareva & Hajime Katayama, 2010. "Does the version of the Penn World Tables matter? An analysis of the relationship between growth and volatility," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 43(1), pages 152-179, February.
  4. Jeffrey Edwards & Benhua Yang, 2009. "An empirical refinement of the relationship between growth and volatility," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(11), pages 1331-1343.
  5. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 391-407, March.
  6. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(1), pages 49-123, January.
  7. John W. Dawson & Joseph P. Dejuan & John J. Seater & E. Frank Stephenson, 2001. "Economic information versus quality variation in cross-country data," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 34(4), pages 988-1009, November.
  8. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(1), pages 112-156, March.
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