On the Non-Causal Link between Volatility and Growth
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.
|Date of creation:||08 Mar 2010|
|Date of revision:||08 Mar 2010|
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