Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79835
Authors: 
Wälde, Klaus
Launov, Andrey
Posch, Olaf
Year of Publication: 
2013
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung - Session: Expectation and Fluctuations C21-V3
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 ndings 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 re- stored. In short, we suggest that the variance equation must include relevant control variables to estimate the volatility-growth link.
JEL: 
E32
O47
O41
Document Type: 
Conference Paper

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