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Growth, Structural Transformation, and Volatility

  • Loris Rubini

I study how growth, via structural transformation, affects volatility. Growth in the United States has led to a shift in resources from agriculture and manufacturing to services. Since the service sector is the least volatile, this shift can potentially reduce aggregate volatility. Existing studies have explored this idea by aggregating sectoral volatilities to the economy-wide volatility when the sector shares are independent of sectoral shocks. But theories of structural transformation highlight the strong links between these: sectoral shocks are the source of changes in sectoral shares. I incorporate this relationship by developing a fully specified dynamic model of structural transformation with real business cycles, and use it to derive the equilibrium relationship between sectoral and aggregate volatilities. I then feed into my model the measured sectoral volatilities and growth trends. I find that growth, via structural transformation, can account for one third of the reduction in the volatility of US GDP in 1984-2007 compared to 1947-1983. This contrasts existing work that suggests that aggregate volatility is largely influenced by sectoral composition.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 444.

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Date of creation: 2013
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Handle: RePEc:ioe:doctra:444
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  1. Alessio Moro, 2009. "The structural transformation between manufacturing and services and the deline in the U.S. GDP volatility," Economics Working Papers we091409, Universidad Carlos III, Departamento de Economía.
  2. Lee Ohanian & Andrea Raffo & Richard Rogerson, 2006. "Long-term changes in labor supply and taxes: evidence from OECD countries, 1956-2004," Research Working Paper RWP 06-16, Federal Reserve Bank of Kansas City.
  3. Vasco M. Carvalho & Xavier Gabaix, 2010. "The Great Diversification and its Undoing," NBER Working Papers 16424, National Bureau of Economic Research, Inc.
  4. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
  5. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  6. Jose Maria Da Rocha & Diego Restuccia, 2006. "The Role of Agriculture in Aggregate Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 455-482, July.
  7. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  8. Irvine, F. Owen & Schuh, Scott, 2005. "Inventory investment and output volatility," International Journal of Production Economics, Elsevier, vol. 93(1), pages 75-86, January.
  9. Bah, El-hadj M., 2007. "A Three-Sector Model of Structural Transformation and Economic Development," MPRA Paper 10654, University Library of Munich, Germany, revised 19 Sep 2008.
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