On the link between volatility and growth: evidence from Canadian Provinces

Abstract

This study examines the relationship between business-cycle volatility and economic growth using data from 10 Canadian provinces over the 1961–2000 period. Test results based on cross-section and panel data estimation indicate, at best, a weak positive volatility–growth relationship.

Notes

¹ Many empirical cross-section studies on regional convergence have found that initial per capita GDP (y ₁₉₆₁,  _i ) is a key explanatory variable in growth regression. In light of this, one may ask whether the positive coefficient and statistical significance of σ _i in Equation 3 is due to the failure to include y ₁₉₆₁,  _i in the equation. To examine this issue, we re-estimated Equation 3 with the y ₁₉₆₁,  _i variable included and obtained the following result:

The adjusted R ² for this regression is 0.800, which clearly indicates that y ₁₉₆₁,  _i explains a significant amount of variation in provincial GDP growth. However, the estimated coefficient of σ _i remains positive and statistically significant at the 10% level.

² We also tried including several conditioning variables (such as labour force growth and a measure of human capital) in the model but found them statistically insignificant. The estimated coefficient of σ _i remained insignificant throughout each of the alternative specifications.

³ This result is consistent with those in Coulombe and Lee (1995).