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On the non-causal link between volatility and growth

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Author Info
Olaf POSCH (Aarhus University and CREATES, CESifo)
Klaus W€LDE (University of Mainz, CESifo, and UCL Louvain la Neuve)

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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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Publisher 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
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Handle: RePEc:ctl:louvir:2009025

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

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
C65 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Miscellaneous Mathematical Tools

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References listed on IDEAS
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. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Olaf Posch, 2008. "Explaining output volatility: The case of taxation," CREATES Research Papers 2008-04, School of Economics and Management, University of Aarhus. [Downloadable!]
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  3. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August. [Downloadable!] (restricted)
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