%0 Journal Article
%T Growth and Volatility Reconsidered: Reconciling Opposite Views
%A L. Bisio
%A L. Ventura
%J ISRN Economics
%D 2013
%R 10.1155/2013/381368
%X Many contributions in the recent literature have investigated over the relationship between GDP growth and its volatility without getting a clear and unambiguous answer. Besides reassessing the well-known effect of output volatility on growth as benchmark analysis, this study aims at looking into the ¡°black box¡± of the business cycle volatility by disentangling the impacts of volatility of GDP major components¡ªthat is, private consumption, private investment and government expenditure¡ªon growth, simultaneously considered. Our empirical analysis unveils a remarkably robust and strong negative correlation of consumption volatility with mean growth and a positive one with volatility of investment and of public expenditure. If these findings shed some additional light on the (still controversial) relationship between economic fluctuations and growth, they will also make it possible to compare the relative impact of each component, with possibly relevant policy implications. Importantly, this might reconcile opposite views about the issue that different empirical results might originate from the relative importance across empirical studies of the various components of volatility. 1. Introduction Among the issues economists largely debated upon over the recent decades, the relationship between the volatility of business cycle and output growth deserves a particular attention. Nonetheless, for a long time, long-run growth and business cycle were conceived of as independent phenomena to be analyzed by means of separated tools. This view was strongly supported by Lucas [1] who claimed that the trade-off between growth and business cycle fluctuations was pretty inexistent. Then, the Real Business Cycle (RBC) paradigm [2] pointed to the exogenous stochastic process driving the technological progress as the common root of both trend growth and cyclical fluctuations. However, once the endogenous technological progress hypothesis was introduced into the RBC framework [3, 4] the idea of a causal relationship between the instability of the business cycle and growth gained theoretical support, thereby prompting the subsequent empirical literature on volatility and growth (see Aghion and Saint-Paul [5] for a very interesting analysis of the theoretical evolution on this issue and Gaggl and Steindl [6] for a literature review on growth and cycle). This paper is meant to contribute to the stream of literature which aimed at verifying both the existence of a statistically significant causal relationship between output volatility and growth and the sign of that relationship.
%U http://www.hindawi.com/journals/isrn.economics/2013/381368/