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On the non-causal link between volatility and growth

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  • Olaf POSCH

    (Aarhus University and CREATES, CESifo)

  • Klaus WALDE

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

Abstract

A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels differ both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2009025.

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Length: 28
Date of creation: 27 Aug 2009
Date of revision:
Handle: RePEc:ctl:louvir:2009025

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Keywords: Tax effects; Volatility measures; Poisson uncertainty; Endogenous cycles and growth; Continuous-time DSGE models;

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References

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  1. Posch, Olaf, 2011. "Explaining output volatility: The case of taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 95(11), pages 1589-1606.
  2. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(4), pages 825-853, August.
  3. Martin, Philippe & Rogers, Carol Ann, 1995. "Stabilization Policy, Learning by Doing, and Economic Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1130, C.E.P.R. Discussion Papers.
  4. Hellwig, Martin & Irmen, Andreas, 2001. "Endogenous Technical Change in a Competitive Economy," Journal of Economic Theory, Elsevier, Elsevier, vol. 101(1), pages 1-39, November.
  5. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  6. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  7. Olaf Posch, 2007. "Structural estimation of jump-diffusion processes in macroeconomics," CREATES Research Papers 2007-23, School of Economics and Management, University of Aarhus.
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Cited by:
  1. Olaf Posch, 2008. "Explaining output volatility: The case of taxation," CREATES Research Papers 2008-04, School of Economics and Management, University of Aarhus.
  2. Robert Feicht & Wolfgang Stummer, 2010. "Complete Closed-form Solution to a Stochastic Growth Model and Corresponding Speed of Economic Recovery preliminary," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c015_041, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Christian Bayer & Klaus Waelde, 2011. "Existence, Uniqueness and Stability of Invariant Distributions in Continuous-Time Stochastic Models," Working Papers 1111, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 21 Jul 2011.

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