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ISRN Economics
Volume 2013 (2013), Article ID 381368, 17 pages
http://dx.doi.org/10.1155/2013/381368
Research Article

Growth and Volatility Reconsidered: Reconciling Opposite Views

Department of Economics and Law, Sapienza University of Rome, Via del Castro Laurenziano 9, 00161 Rome, Italy

Received 5 June 2013; Accepted 21 July 2013

Academic Editors: L. Grilli, J.-L. Hu, and M. T. Leung

Copyright © 2013 L. Bisio and L. Ventura. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Many contributions in the recent literature have investigated over the relationship between GDP growth and its volatility without getting a clear and unambiguous answer. Besides reassessing the well-known effect of output volatility on growth as benchmark analysis, this study aims at looking into the “black box” of the business cycle volatility by disentangling the impacts of volatility of GDP major components—that is, private consumption, private investment and government expenditure—on growth, simultaneously considered. Our empirical analysis unveils a remarkably robust and strong negative correlation of consumption volatility with mean growth and a positive one with volatility of investment and of public expenditure. If these findings shed some additional light on the (still controversial) relationship between economic fluctuations and growth, they will also make it possible to compare the relative impact of each component, with possibly relevant policy implications. Importantly, this might reconcile opposite views about the issue that different empirical results might originate from the relative importance across empirical studies of the various components of volatility.