The link between economic growth and growth volatility

Abstract

This paper investigates the relationship between economic growth and growth volatility through simultaneous equations system. By employing the identification through heteroskedasticity method of Rigobon (Rev Econ Stat 85:777-792, 2003) and using a panel of 158 countries over the period 1960-2010, we find that output volatility is detrimental to economic growth, suggesting that stabilization policies to mitigate short-run economic fluctuations contribute to long-run economic growth. And economic growth accelerates output variability, supporting the feedback effects from growth to the volatility. The evidence is robust to a number of sensitivity tests.