GROWTH AND VOLATILITY RELATIONSHIPS REEXAMINED: THE ROLE OF AGGREGATION

Author

Haya Khan, Southern Illinois University CarbondaleFollow

Date of Award

5-1-2024

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Morshed, AKM Mahbub

Abstract

This dissertation studies the relationship between output growth rate and its volatility. This study sheds light on International, Regional, and Development Economics literature. In the first chapter, we revisit the relationship between output growth rate and its volatility using cross-section techniques for our panel data set from 60 countries from 1970 to 2019. In addition to the conventional volatility measurement of the standard deviation, we incorporate the higher moments, such as skewness and kurtosis, as volatility measures. Higher moments further sharpen our understanding of the volatility and growth rate relationship. We also examine the role of the irreversibility of investment, a purported proximate factor for increased volatility in theory but not applied to empirical models, on the growth rate. We find that a higher level of the irreversibility of investment tends to reduce the growth rate. In the second chapter, we examine the growth-volatility relationship covering manufacturing activities at the two-digit level in 32 countries. In particular, we conduct a comprehensive analysis to reveal the long-term relationship between output growth rate and volatility over 1970 – 2019 within countries and across sectors. We have data for each manufacturing subsector for each country over a long period. We have redefined the growth rate and volatility measures with alternative definitions such as cross-country and cross-sector across time. This offers additional advantages from an econometric perspective, as the large cross-sectional dimension is beneficial when estimating the determinants of growth rate. Moreover, our study assesses the evolution of the long-term relationship between economic sectoral growth rate and sectoral volatility over time. Overall, we find that growth rate and volatility are negatively related, with a few exceptions. The third chapter investigates the relationship between regional growth rate and volatility in U.S. state regions. We use disaggregated data for manufacturing activities over the period 1977 – 2021. We find a significant positive relationship between sectoral volatility and GDP per worker growth rate across the U.S. states regions, meaning that manufacturing volatile sectors for the U.S. are growing faster. This finding is also robust in including additional control variables in the analysis, thus confirming that volatility does not capture the effect of other potential determinants of GDP growth in the manufacturing sectors. We further examine how policy structure and geographical similarity affect regional growth rates, in which we distinguish between the Democrat and Republican Parties and Coastline and Non-Coastline states. We find that the growth rate and volatility relationship has been weaker for Democrat-leading states and geographically more open states (states with a coastline). This suggests that the growth rate and volatility relationship can be altered by having a supporting fiscal policy or having a more open economy.