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Why the Link Between Volatility and Growth is Both Positive and Negative

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Author Info
Imbs, Jean

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Abstract

I revisit the relationship between growth and volatility in two different disaggregated datasets. I confirm that growth and volatility are negatively related across countries, but show that the relation reverses itself across sectors. This phenomenon, sometimes called the ‘Simpson’s fallacy’, has a natural interpretation in the present context: it is the component of aggregate volatility that is common across sectors that correlates negatively with aggregate growth. Furthermore, while investment and volatility are unrelated in the aggregate, sectoral investment is shown to be more intense in volatile activities, as if the return to capital were higher there. These results call for a distinction between macroeconomic and sectoral volatilities, not unlike that between macroeconomics, where volatility often means policy-driven instability, and finance, where volatility reflects risk, and thus high returns.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3561.

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Date of creation: Sep 2002
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Handle: RePEc:cpr:ceprdp:3561

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Keywords: growth sectors volatility

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2004. "The Positive Link Between Financial Liberalization, Growth and Crises," NBER Working Papers 10293, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Ayhan Kose & Marco E. Terrones & Eswar Prasad, 2004. "How do trade and financial integration affect the relationship between growth and volatility?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
    Other versions:
  3. Leonidas Spiliopoulos, 2005. "What determines macroeconomic volatility? A cross-section and panel data study," Macroeconomics 0505026, EconWPA. [Downloadable!]
  4. Keith Blackburn & Dimitrios Varvarigos, 2008. "Human capital accumulation and output growth in a stochastic environment," Economic Theory, Springer, vol. 36(3), pages 435-452, September. [Downloadable!] (restricted)
  5. Ramirez-Rondán Nelson, 2007. "Nonlinear Volatility Effects on Growth in Developing Economies," Working Papers 2007-016, Banco Central de Reserva del Perú. [Downloadable!]
  6. K Blackburn & D Varvarigos, 2006. "Human Capital Accumulation in a Stochastic Environment: Some New Results on the Relationship Between Growth and Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 74, Economics, The Univeristy of Manchester. [Downloadable!]
  7. Aaron Tornell, 2003. "Liberalization, Growth and Financial Crises (October 2003)," UCLA Economics Online Papers 276, UCLA Department of Economics. [Downloadable!]
  8. Jörg Döpke, 2004. "How Robust is the Empirical Link between Business-Cycle Volatility and Long-Run Growth in OECD Countries?," International Review of Applied Economics, Taylor and Francis Journals, vol. 18(1), pages 1-23, January. [Downloadable!] (restricted)
  9. Dimitrios Varvarigos, 2006. "On stabilisation policy: Are there conflicting implications for growth and welfare?," Discussion Paper Series 2006_19, Department of Economics, Loughborough University, revised Jul 2006. [Downloadable!]
  10. E Andreou & A Pelloni & M Sensier, 2003. "The effect of nominal shock uncertainty on output growth," Centre for Growth and Business Cycle Research Discussion Paper Series 40, Economics, The Univeristy of Manchester. [Downloadable!]
  11. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank. [Downloadable!]
  12. Hausmann, Ricardo & Rodriguez, Francisco & Wagner, Rodrigo, 2006. "Growth Collapses," Working Paper Series rwp06-046, Harvard University, John F. Kennedy School of Government. [Downloadable!]
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