The Effects of Expected and Unexpected Volatility on Long‐Run Growth: Evidence from 18 Developed Economies

Abstract

This article examines the relationship between output volatility and long‐run growth for 18 developed countries between 1880 and 1990. The analysis builds on the existing literature by decomposing output growth volatility into expected and unexpected components and then examining whether the types of volatility have different effects on long‐run growth. The results are consistent with the view that unexpected volatility reduces long‐run growth and that expected volatility increases long‐run growth. The results also suggest that the combined effect of expected and unexpected volatility is to reduce long‐run growth for most countries and most time periods.