Does growth affect volatility? An empirical study on developing countries

Abstract

Whereas economic growth and business cycles have received significant attention in the literature, they are typically examined separately. However, recent studies have found a causality in which short-term output volatility affects economic growth (volatility-growth causality). In contrast, in this study, we examine whether the opposite causality, from economic growth to short-term output volatility (growth-volatility causality), exists. The existence of volatility-growth causality does not necessarily exclude the existence of growth-volatility causality, and the two causalities may coexist. We empirically examine growth-volatility causality, and the results of our econometric analyses confirm its existence.

Keywords:

• economic growth
• output volatility
• developing countries
• causality

JEL Classification:

• E32
• O40

Acknowledgements

The author would like to express his gratitude to an anonymous referee for the invaluable comments. The responsibility for any errors in the article lies solely with the author.

Notes

¹ Loayza et al. (2007) and Burnside and Tabova (2009) also focus on developing countries. However, they do not examine causality because their research interests are different from ours.