Policy volatility and economic growth: A comparative, empirical analysis

Abstract

This paper provides a comparative test of different measures of policy volatility in cross-country growth regressions. All variables are tested in the same basic specifications and a number of sensitivity checks of the results are performed. Policy volatility is measured either as the standard deviation, the coefficient of variation or the standard errors of autoregressive processes of macroeconomic variables. The analysis shows that, regardless of the particular indicator used, such measures of fiscal and monetary volatility are negatively and often significantly related to cross-country differences in economic growth. In many cases, however, this relationship proves to be rather sensitive to variations in country samples and to variations in the specifications of the growth regression estimated.