Department of Economics and Business Economics

On the link between volatility and growth

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  • Olaf Posch
  • K. Wälde, Université Catholique de Louvain
A model of growth with endogenous innovation and distortionary taxes is presented. Since innovation is the only source of volatility, any variable that influences innovation directly affects volatility and growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels differ in their volatility and growth process. We obtain analytical measures of macro volatility based on cyclical output and on output growth rates for plausible parametric restrictions. This analysis implies that controls for taxes should be included in the standard growth-volatility regressions. Our estimates show that the conventional Ramey-Ramey coefficient is affected sizeably. In addition, tax levels do indeed appear to affect volatility in our empirical application.
Original languageEnglish
JournalJournal of Economic Growth
Volume16
Issue4
Pages (from-to)285-308
Number of pages24
ISSN1381-4338
DOIs
Publication statusPublished - 2011

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