On the non-causal link between volatility and growth
Olaf Posch (Aarhus University), Klaus Wälde (Johannes Gutenberg Universität Mainz):
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.
University of Mainz Discussion Paper Series, Link
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.
University of Mainz Discussion Paper Series, Link
08.04.2010 | Forschungsarbeit

