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On the estimation of the volatility-growth link

Author

Listed:
  • Andrey LAUNOV

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

  • Olaf POSCH

    () (Aarhus University and CREATES, CESifo)

  • Klaus WÄLDE

    () (University of Mainz, CESifo, Center for Structural Estimation, University of Bristol and UCL Louvain-la-Neuve (IRES))

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 findings 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.

Suggested Citation

  • Andrey LAUNOV & Olaf POSCH & Klaus WÄLDE, 2012. "On the estimation of the volatility-growth link," LIDAM Discussion Papers IRES 2012009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2012009
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    References listed on IDEAS

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    Cited by:

    1. Joya, Omar, 2015. "Growth and volatility in resource-rich countries: Does diversification help?," Structural Change and Economic Dynamics, Elsevier, vol. 35(C), pages 38-55.

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    More about this item

    Keywords

    volatility and growth; growth regression; endogenous variance unbiased estimates;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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