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Summer 2015

ISSN 0890-913X

Volume 30, Number 2

Categories: Summer 2015 | Freedom

The Empirical Volatility-Growth Relationship: Is Economic Freedom the Missing Link?

John W. Dawson, Appalachian State University

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TheJournalofPrivateEnterprise30(2),2015,61–82TheEmpiricalVolatility-GrowthRelationship:IsEconomicFreedomtheMissingLink?JohnW.Dawson∗AppalachianStateUniversity______________________________________________________AbstractThispaperexaminestheroleofeconomicfreedomintheempiricalrelationshipbetweenbusinesscyclevolatilityandlong-rungrowthacrosscountries.Inadiversesampleofninety-ninecountries,accountingforeconomicfreedom’sinfluenceonvolatilitymitigatesoreveneliminatesthenegativeimpactofvolatilityongrowth.Evidencealsosuggeststhattheimpactofvolatilityongrowthisnothomogeneousacrosscountriesatdifferentlevelsoffreedom.Inparticular,volatilityhasanegativeimpactongrowthonlyincountriesatverylowlevelsofeconomicfreedom.Mixedresultsinpreviousstudiessuggestedamorecomplicatedrelationshipbetweenvolatilityandgrowth,buttherewasnoclearevidencethateconomicfreedomwasthemissinglink.__________________________________________________________JELcodes:E32,O43Keywords:businesscycles,volatility,growth,economicfreedomI.IntroductionRameyandRamey(1995)iswidelyregardedasthebenchmarkempiricalstudyoftherelationshipbetweenbusinesscyclevolatilityandlong-runeconomicgrowth.TheRameysreportanegativerelationshipbetweenvolatilityandgrowthinabroadcross-sectionofcountries.Anumberofmorerecentstudiesconfirmthefindingofanegativevolatility-growthrelationship,includingMartinandRogers(2000),FatasandMihov(2003),Mobarak(2005),Badinger(2010),andFurceri(2010).Stillotherrecentstudies,however,reportapositiverelationship;see,forexample,StastnyandZagler(2007)andLee(2010).TwostudiesthatpredateRameyandRamey—oftenignoredinthisliterature—alsoexaminethevolatility-growthrelationship.Intheirbroadsearchfordeterminantsofcross-country∗IamgratefultoJimGwartney,MarkStrazicich,sessionparticipantsatthe2014annualmeetingsoftheAssociationforPrivateEnterpriseEducationinLasVegas,andtwoanonymousrefereesforhelpfulcommentsthatimprovedthequalityofthispaper.Anyremainingerrorsaremyown.61

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Title	The Empirical Volatility-Growth Relationship: Is Economic Freedom the Missing Link?
Authors/Creators:	John W. Dawson, Appalachian State University
Year:	2015
Volume:	30
Number:	2
Pages:	61 - 82
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	business cycles, volatility, growth, economic freedom

Citation:
Dawson, John W. / 2015. "The Empirical Volatility-Growth Relationship: Is Economic Freedom the Missing Link?." The Journal of Private Enterprise, 30(2): 61-82.