Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103101
Authors: 
Launov, Andrey
Posch, Olaf
Wälde, Klaus
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 5018
Abstract: 
It is common practice to estimate the volatility-growth link by specifying a standard growth equation such that the variance of the error term appears as an explanatory variable in this growth equation. The variance in turn is modelled by a second equation. Hardly any of existing applications of this framework includes exogenous controls in this second variance equation. Our theoretical findings suggest that the absence of relevant explanatory variables in the variance equation leads to a biased and inconsistent estimate of the volatility-growth link. Our simulations show that this effect is large. Once the appropriate controls are included in the variance equation consistency is restored. In short, we suggest that the variance equation must include relevant control variables to estimate the volatility-growth link.
Subjects: 
volatility and growth
growth regression
endogenous variance
unbiased estimates
JEL: 
E32
O47
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.