Journal of Economic Growth

, Volume 16, Issue 4, pp 285–308 | Cite as

On the link between volatility and growth

Article

Abstract

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.

Keywords

Tax effects Volatility measures Poisson uncertainty Endogenous cycles and growth Continuous-time DSGE models 

JEL Classification

E32 E62 H3 C65 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of Economics and BusinessAarhus University and CREATES, CESifoAarhus CDenmark
  2. 2.Mainz School of Management and EconomicsUniversity of Mainz, CESifo, and Université catholique de LouvainMainzGermany

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