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On the Non-Causal Link between Volatility and Growth

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  • Olaf Posch

    ()
    (School of Economics amd Management, Ahrhus University, Denmark)

  • Klaus Wälde

    (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany)

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 e ects through which economies with di erent tax levels di er both in their volatility and growth. Using a continuous-time dynamic stochastic general equilibrium (DSGE) model with plausible parametric restrictions, we obtain closed-form 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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File URL: http://www.macro.economics.uni-mainz.de/RePEc/pdf/Discussion_Paper_1002.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz in its series Working Papers with number 1002.

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Length: 30 pages
Date of creation: 08 Mar 2010
Date of revision: 08 Mar 2010
Handle: RePEc:jgu:wpaper:1002

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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. 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.
  2. Olaf Posch, 2007. "Structural estimation of jump-diffusion processes in macroeconomics," CREATES Research Papers 2007-23, School of Economics and Management, University of Aarhus.
  3. Hellwig, Martin & Irmen, Andreas, 2001. "Endogenous Technical Change in a Competitive Economy," Journal of Economic Theory, Elsevier, vol. 101(1), pages 1-39, November.
  4. Martin, Philippe & Rogers, Carol Ann, 1997. "Stabilization Policy, Learning-by-Doing, and Economic Growth," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 152-66, April.
  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. Olaf Posch, 2008. "Explaining output volatility: The case of taxation," CREATES Research Papers 2008-04, School of Economics and Management, University of Aarhus.
  7. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
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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 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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