IDEAS home Printed from https://ideas.repec.org/p/col/000122/010944.html
   My bibliography  Save this paper

Volatility and Growth: An Explanation for the Disagreement

Author

Listed:
  • Michael Jetter

Abstract

This paper reconsiders the effects of volatile growth rates on growth itself. I show that the underlying endogeneity of government size can hide the net growth effects from volatility. There exists a positive direct and a negative indirect channel, with the latter operating through the size of the public sector. Risk-averse citizens respond to volatility either with precautionary savings (direct effect) or by demanding a stronger public safety net, which in turn lowers growth (indirect effect). However, the indirect channel is only available if the political regime allows citizens to determine their desired level of public services. I test this theory on a balanced panel of 95 countries from 1960 { 2010. The paper reveals the latent endogeneity of government size in a single growth equation framework and offers a simultaneous estimation method as an alternative. Results support the existence of both effects. The direct channel is stronger in autocratic societies, but as a country turns to democracy the indirect channel dominates. Volatility has a positive net effect on growth in autocratic nations, but a negative net effect in democratic societies. This finding explains why previous growth analyses of volatility at times reached contradicting conclusions.

Suggested Citation

  • Michael Jetter, 2013. "Volatility and Growth: An Explanation for the Disagreement," Documentos de Trabajo de Valor Público 10944, Universidad EAFIT.
    • Handle: RePEc:col:000122:010944
    as

    Download full text from publisher

    File URL: http://repository.eafit.edu.co/bitstream/handle/10784/995/2013_13_Michael_Jetter.pdf?sequence=1&isAllowed=y
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
    2. Mirman, Leonard J, 1971. "Uncertainty and Optimal Consumption Decisions," Econometrica, Econometric Society, vol. 39(1), pages 179-185, January.
    3. Devereux, Michael B & Smith, Gregor W, 1994. "International Risk Sharing and Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-550, August.
    4. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
    5. Durlauf, Steven N. & Johnson, Paul A. & Temple, Jonathan R.W., 2005. "Growth Econometrics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.),Handbook of Economic Growth, edition 1, volume 1, chapter 8, pages 555-677, Elsevier.
    6. Davide Furceri, 2010. "Long-run growth and volatility: which source really matters?," Applied Economics, Taylor & Francis Journals, vol. 42(15), pages 1865-1874.
    7. Badinger, Harald, 2010. "Output volatility and economic growth," Economics Letters, Elsevier, vol. 106(1), pages 15-18, January.
    8. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
    9. Imbs, Jean, 2007. "Growth and volatility," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1848-1862, October.
    10. Henderson, Daniel J. & Papageorgiou, Chris & Parmeter, Christopher F., 2013. "Who benefits from financial development? New methods, new evidence," European Economic Review, Elsevier, vol. 63(C), pages 47-67.
    11. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    12. Erik Canton, 2002. "Business cycles in a two-sector model of endogenous growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(3), pages 477-492.
    13. Miklós Koren & Silvana Tenreyro, 2007. "Volatility and Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(1), pages 243-287.
    14. Olaf Posch & Klaus Wälde, 2011. "On the link between volatility and growth," Journal of Economic Growth, Springer, vol. 16(4), pages 285-308, December.
    15. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-888, September.
    16. Imbs, Jean, 2002. "Why the Link Between Volatility and Growth is Both Positive and Negative," CEPR Discussion Papers 3561, C.E.P.R. Discussion Papers.
    17. Martin, Philippe & Ann Rogers, Carol, 2000. "Long-term growth and short-term economic instability," European Economic Review, Elsevier, vol. 44(2), pages 359-381, February.
    18. Shelton, Cameron A., 2007. "The size and composition of government expenditure," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2230-2260, December.
    19. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    20. Dawson, John W. & Stephenson, E. Frank, 1997. "The link between volatility and growth: Evidence from the States," Economics Letters, Elsevier, vol. 55(3), pages 365-369, September.
    21. M. Ayhan Kose & Eswar S. Prasad & Marco E. Terrones, 2005. "Growth and Volatility in an Era of Globalization," IMF Staff Papers, Palgrave Macmillan, vol. 52(si), pages 31-63.
    22. Afonso, António & Furceri, Davide, 2010. "Government size, composition, volatility and economic growth," European Journal of Political Economy, Elsevier, vol. 26(4), pages 517-532, December.
    23. Barro, Robert J. & Lee, Jong-Wha, 1994. "Sources of economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 1-46, June.
    24. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
    25. Jetter, Michael & Nikolsko-Rzhevskyy, Alex & Smith, William T., 2013. "The effects of wage volatility on growth," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 93-109.
    26. Cohen-Cole, Ethan B. & Durlauf, Steven N. & Rondina, Giacomo, 2012. "Nonlinearities in growth: From evidence to policy," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 42-58.
    27. Terence C. Mills, 2000. "Business Cycle Volatility and Economic Growth: A Reassessment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 23(1), pages 107-116, September.
    28. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-963, September.
    29. Wang, Peng-fei & Wen, Yi, 2011. "Volatility, growth, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1696-1709, October.
    30. Mr. Charalambos G Tsangarides & Mr. Alin T Mirestean, 2009. "Growth Determinants Revisited," IMF Working Papers 2009/268, International Monetary Fund.
    31. Philippe Aghion & Steven Durlauf (ed.), 2005. "Handbook of Economic Growth," Handbook of Economic Growth, Elsevier, edition 1, volume 1, number 1.
    32. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    33. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
    34. Stefan C. Norrbin & F. Pinar Yigit, 2005. "The Robustness of the Link between Volatility and Growth of Output," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(2), pages 343-356, July.
    35. Robert J. Barro, 2001. "Human Capital and Growth," American Economic Review, American Economic Association, vol. 91(2), pages 12-17, May.
    36. Oikawa, Koki, 2010. "Uncertainty-driven growth," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 897-912, May.
    37. Klomp, Jeroen & de Haan, Jakob, 2009. "Political institutions and economic volatility," European Journal of Political Economy, Elsevier, vol. 25(3), pages 311-326, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martha Elena Delgado-Rojas & Hernán Rincón-Castro, 2017. "Incertidumbre acerca de la política fiscal y ciclo económico," Borradores de Economia 1008, Banco de la Republica de Colombia.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jetter, Michael, 2014. "Volatility and growth: Governments are key," European Journal of Political Economy, Elsevier, vol. 36(C), pages 71-88.
    2. Jetter, Michael & Nikolsko-Rzhevskyy, Alex & Smith, William T., 2013. "The effects of wage volatility on growth," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 93-109.
    3. Barbara Annicchiarico & Alessandra Pelloni, 2014. "Productivity growth and volatility: how important are wage and price rigidities?," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 306-324, January.
    4. Ghulam MOHEY-UD-DIN* & Muhammad Wasif SIDDIQI**, 2017. "GDP FLUCTUATIONS AND LONG-RUN ECONOMIC GROWTH: A Study of Selected South Asian Countries," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(1), pages 41-66.
    5. Antonakakis, N. & Badinger, H., 2016. "Economic growth, volatility, and cross-country spillovers: New evidence for the G7 countries," Economic Modelling, Elsevier, vol. 52(PB), pages 352-365.
    6. Christoph Priesmeier & Nikolai Stähler, 2011. "Long Dark Shadows Or Innovative Spirits? The Effects Of (Smoothing) Business Cycles On Economic Growth: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 25(5), pages 898-912, December.
    7. Nikolaos Antonakakis & Harald Badinger, 2012. "Output Volatility, Economic Growth, and Cross-Country Spillovers: New Evidence for the G7 Countries," Department of Economics Working Papers wuwp141, Vienna University of Economics and Business, Department of Economics.
    8. Alimi, Nabil, 2016. "Volatility and growth in developing countries: An asymmetric effect," The Journal of Economic Asymmetries, Elsevier, vol. 14(PB), pages 179-188.
    9. Hans Pitlik & Margit Schratzenstaller-Altzinger, 2011. "Growth Implications of Structure and Size of Public Sectors," WIFO Working Papers 404, WIFO.
    10. repec:wsr:wpaper:y:2012:i:098 is not listed on IDEAS
    11. Irene Brunetti & Davide fiaschi & Lisa Gianmoena, 2013. "An Index of Growth Rate Volatility: Methodology and an Application to European Regions," Discussion Papers 2013/169, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    12. Andrey LAUNOV & Olaf POSCH & Klaus WÄLDE, 2012. "On the estimation of the volatility-growth link," LIDAM Discussion Papers IRES 2012009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    13. Barbara Annicchiarico & Luisa Corrado & Alessandra Pelloni, 2011. "Long‐Term Growth And Short‐Term Volatility: The Labour Market Nexus," Manchester School, University of Manchester, vol. 79(s1), pages 646-672, June.
    14. Balavac, Merima & Pugh, Geoff, 2016. "The link between trade openness, export diversification, institutions and output volatility in transition countries," Economic Systems, Elsevier, vol. 40(2), pages 273-287.
    15. Antonio Fatás & Ilian Mihov, 2013. "Policy Volatility, Institutions, and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 362-376, May.
    16. John W. Dawson, 2015. "The Empirical Volatility-Growth Relationship: Is Economic Freedom the Missing Link?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Summer 20), pages 61-82.
    17. Bisio, Laura & Ventura, Luigi, 2012. "Growth and volatility reconsidered: reconciling opposite views," MPRA Paper 35937, University Library of Munich, Germany.
    18. Roberto Ezcurra & Vicente Rios, 2015. "Volatility and Regional Growth in Europe: Does Space Matter?," Spatial Economic Analysis, Taylor & Francis Journals, vol. 10(3), pages 344-368, September.
    19. Loayza,Norman V. & Ouazad,Amine & Ranciere,Romain, 2017. "Financial development, growth, and crisis: is there a trade-off ?," Policy Research Working Paper Series 8237, The World Bank.
    20. Ferraro, Domenico, 2017. "Volatility and slow technology diffusion," European Economic Review, Elsevier, vol. 96(C), pages 18-37.
    21. Jemberu Lulie Mekonnen & Ali Suut Dogruel, 2018. "Growth and Volatility Nexus in Sub‐Saharan Africa," African Development Review, African Development Bank, vol. 30(2), pages 175-186, June.

    More about this item

    Keywords

    Volatility; Business Cycles; Economic Growth;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000122:010944. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Valor Público EAFIT - Centro de estudios e incidencia (email available below). General contact details of provider: https://edirc.repec.org/data/cieafco.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.