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On the Non-Causal Link between Volatility and Growth

Author

Listed:
  • 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.

Suggested Citation

  • Olaf Posch & Klaus Wälde, 2010. "On the Non-Causal Link between Volatility and Growth," Working Papers 1002, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 08 Mar 2010.
    • Handle: RePEc:jgu:wpaper:1002
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    Cited by:

    1. Mickaël Clévenot & Marie Silvère Mbome, 2014. "Reassessing Vulnerability to Macroeconomic Volatility: a nonstationary panel approach," Working Papers hal-00951544, HAL.
    2. 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.
    3. 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.
    4. repec:hal:cepnwp:hal-00951544 is not listed on IDEAS
    5. Posch, Olaf, 2011. "Explaining output volatility: The case of taxation," Journal of Public Economics, Elsevier, vol. 95(11), pages 1589-1606.

    More about this item

    Keywords

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    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; Modern Monetary Theory
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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