The dynamics of economic growth and output volatility

Subject Areas : Financial Economics

Karim Emami ¹ (Assistant professor of Economics, Islamic Azad University, Science and Research Branch)
Shohreh Vakilian ² (M.A. in Economics.)

Received: 2015-06-13 Accepted : 2015-06-13 Published : 2008-12-21

Keywords: Panel Data, Output volatility, growth,

Abstract :

Until the 3996’s, business cycle theory and growth theory were treated as two separate and unrelated realms. It was believed that business cycles would cast only short run but not long run effects on growth. Charles Nelson and Charles Plosser (3992) were the first to challenge this view. They argue that shocks contribute substantially to variation in output. King, Plosser and Rebelo (3999) argue that economic fluctuations influence the process of stochastic growth. They suggest that temporary shocks can have permanent effects on the level of economic activity. This new view supports the existence of a link between volatility and long-run growth. This study attempts to delineate more clearly the relationship between growth and output volatility. The focus of the study is to re-examine the negative relationship between growth and output volatility as Ramey and Ramey (3991) have concluded. In this study, Ramey and Ramey’s (3991) empirical approach has been expanded by revising sample of countries included in this panel data analysis (developed, developing and other countries with data availability over 3903 to 2667.). Data used for this investigation has been gathered from the recent version of the Penn World Table (Summer-Heston-Aten). In order to estimate output volatility, GARCH technique and Panel Data approach have been used. The result of our model has reaffirmed the findings of earlier studies that the inverse relationship exists between economic growth and output volatility.