On the link between volatility and growth
- 715 Downloads
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.
KeywordsTax effects Volatility measures Poisson uncertainty Endogenous cycles and growth Continuous-time DSGE models
JEL ClassificationE32 E62 H3 C65
Unable to display preview. Download preview PDF.
- Boucekkine R., Tamarit R. R. (2004) Imbalance effects in the Lucas model: An analytical exploration. Topics in Macroecon 4(1): 1–17Google Scholar
- Casella G., Berger R. L. (2001) Statistical inference. Duxbury, Belmont, CAGoogle Scholar
- Grossman G. M., Helpman E. (1991) Innovation and growth in the global economy. The MIT Press, Cambridge, MAGoogle Scholar
- Gruber, J. (2006). A tax-based estimate of the elasticity of intertemporal substitution. NBER, w11945.Google Scholar
- Martin P., Rogers C. A. (1997) Stabilization policy, learning-by-doing, and economic growth. Oxford Economic Papers 49: 152–166Google Scholar
- Posch, O. (2011). Explaining output volatility: The case of taxation. Journal of Public Economics. doi: 10.1016/j.jpubeco.2011.05.009.
- Ramey G., Ramey V. A. (1995) Cross-country evidence on the link between volatility and growth. American Economic Review 85(5): 1138–1151Google Scholar
- Segerstrom P. S. (1998) Endogenous growth without scale effects. American Economic Review 88(5): 1290–1310Google Scholar
- Segerstrom P. S., Anant T.C.A., Dinopoulos E. (1990) A schumpeterian model of the product life cycle. American Economic Review 80(5): 1077–1091Google Scholar
- Smith W. T. (2007) Inspecting the mechanism exactly: A closed-form solution to a stochastic growth model. B.E. Journal of Macroeconomics 7(30): 1–31Google Scholar