Recurring Cycles? A Multidimensional Analysis of Economic Volatility and Growth

Abstract

A non-linear model utilising the sine function is proposed as an appropriate model of economic growth over time and is used to examine the link between volatility and economic growth. The most appropriate functional relationship is found by using non-linear generalised least square estimation on data from the EU, EEC and association countries for the period 1997 to 2015. The model suggest that economic growth takes place around a midline and is subject to three different volatility components: 1) a component relating to the maximum and minimum values, or the vertical deviation from the economy’s midline (amplitude); 2) a component relating to the length of adjustment towards the midline, or the horizontal adjustment (frequency); and 3) and a periodic component of adjustment (phase shift). An OLS estimation on the parameter values show a positive relationship between amplitude volatility and economic growth, negative with regard to frequency and positive for phase shift although phase being statistically insignificant.