On the non-causal link between volatility and growth

Posch, Olaf;Wälde, Klaus
(2009) , 28 pages

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Authors
  • Posch, OlafAarhus University
    Author
  • Wälde, KlausUniversity of Mainz
    Author
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 effects through which economies with different tax levels differ both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform 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.
Affiliations
  • Aarhus UniversitySchool of Economics and Management
  • University of MainzChair in Macroeconomics

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Posch, O., & Wälde, K. (2009). On the non-causal link between volatility and growth (IRES Discussion papers 2009025). https://hdl.handle.net/2078.5/250180