Volatility and Regional Growth in Europe: Does Space Matter?

Abstract

This paper examines the relationship between output volatility and regional growth in Europe. To that end, we present a spatially augmented stochastic growth model with technological interdependence among economies. Spatial externalities are used to model technological interdependence, which ultimately implies that the economic growth rate of a particular region is affected not only by its own degree of volatility but also by the output fluctuations experienced by the remaining regions. In order to investigate the empirical validity of this result, we examine the link between volatility and economic growth in a sample of 272 European regions over the period 1991–2011 using spatial econometric techniques. Our estimates show the existence of a negative and statistically significant relationship between volatility and economic performance in the European regions. This is partly due to the role played by spatial spillovers induced by volatility in neighbouring regions. The observed relationship is robust to the inclusion in the analysis of different explanatory variables that may affect both regional growth and business cycle fluctuations. We also check that our results do not depend on the measure or volatility used in the analysis or the econometric specification employed to capture the nature of spatial spillovers.