On the Link Between Volatility and Growth

43 Pages Posted: 19 Aug 2009 Last revised: 17 Jun 2012

See all articles by Olaf Posch

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Klaus Wälde

University of Mainz; CESifo (Center for Economic Studies and Ifo Institute); UCL at Louvain la Neuve

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2011

Abstract

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.

Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models

JEL Classification: E32, E62, H3, C65

Suggested Citation

Posch, Olaf and Wälde, Klaus, On the Link Between Volatility and Growth (August 1, 2011). Journal of Economic Growth, Vol. 16, No. 4, 2011, Available at SSRN: https://ssrn.com/abstract=1456881 or http://dx.doi.org/10.2139/ssrn.1456881

Olaf Posch (Contact Author)

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Klaus Wälde

University of Mainz ( email )

Mainz School of Management and Economics
Mainz, 55128
Germany
+49 6131 3920143 (Phone)

HOME PAGE: http://www.waelde.com

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

UCL at Louvain la Neuve

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Louvain-la-Neuve, 1348
Belgium

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