Prior research on the relationship between output volatility and growth has produced mixed results, lacking clear empirical evidence on the sign of the relationship. This paper investigates volatility-growth relationship from a different angle, with the conjecture that the sign of the volatility-growth relation changes across the business cycle phases. If the conjecture is right, then empirical investigations of data without taking this feature into account will fail to recover non-trivial relation between volatility and growth. We estimate a series of ARCH-type models with the real GDP data of the U.S. and the U.K., and find strong evidence suggesting that the volatility-growth relation is positive when the economy is in expansion, while higher volatility lowers growth rate in the contraction phase.
I. Introduction and Motivation
II. Volatility vs. Growth : Pretests with ARCH-type Models
III. Business Cycle Dependence of the Volatility-Growth Relation
IV. Results for the U.K. GDP
V. Conclusion
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