Cross-Generation and Cross-Country Evidence on the Link between Growth and Volatility

Abstract

This paper reports on a larger scale econometric study of the sign of the relationship between average growth and growth volatility of GDP per capita. At equilibrium, the negativity or the positivity of the relationship between endogenous growth and business cycles volatility is linked to the movements (left or right side) of (PPF). Tests have focused on cross-generation and cross-country evidence on the link between growth and volatility. If production possibilities frontier movements’ trend is to the left side, countries with a higher standard deviation of growth should have their growth adversely affected if at the same time they lose their comparative advantages. Thus international trade elasticity after a production possibilities frontier movement (ei) determines the sign of the relationship between growth and volatility. If (ei -1) < 0, the sign is negative and positive if (ei – 1) > 0. From the theoretical point of view, a new multidimensional trade and optimal growth mechanisms have been presented.