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Elusive Relationship between Business-cycle Volatility and Long-run Growth

Mallick, Debdulal (2015): Elusive Relationship between Business-cycle Volatility and Long-run Growth.

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Abstract

This paper revisits the empirical relationship between business-cycle volatility and long-run growth. The key contribution lies in controlling for fluctuations in the trend growth that also accounts for enormous heterogeneity among countries in their long-run growth trajectories; otherwise, the estimating equation would be misspecified. We find that there is no effect of BC volatility on growth once estimation duly accounts for these fluctuations. Otherwise, there would be a significant effect of BC volatility on growth that also varies across time period and country income groups. We instead find a negative effect of persistence in volatility on growth. The results have implications in light of recent global financial crises, and also for cross-country regressions.

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