Growth Volatility Research Articles

Foreign Direct Investment and Output Volatility Nexus: A Global Analysis

Volatility in output growth remains a genuine concern around the globe because of its detrimental effects on growth, poverty and welfare. In the realm of output volatility, the role of FDI and its consistency is particularly important and worth considering. This article examines the role of FDI inflows and specifically the instability in it on output growth volatility using a panel dataset of 141 world economies for the period 1971–2017. The study employs a variety of estimation techniques like pooled ordinary least squares (POLS), LS fixed effects (FE), LS random effects (RE), two stage least squares (2SLS) and generalised methods of moments (GMM). Findings of the study suggest that FDI acts as the volatility reducing factor, whereas uncertainty in it increases output volatility. On the policy front, this study recommends policies that not only encourage FDI inflows but also ensure the inflows to be more consistent and stable. Our results are robust corresponding to various above-mentioned estimation techniques and sensitivity analysis. JEL Codes: C23, E32, F21

How knowledge and uncertainty affect strategic international business investment decisions: Implications for cross-border mergers and acquisitions

Changes in country-level and global economic conditions create numerous challenges for firms expanding internationally. Country-level changes such as volatility in GDP growth, increasing regulations, and/or inflation may influence temporal periods of static or declining markets and often drive an inward contraction of focus. Conversely, global-level changes such as expanding markets often drive an outward expansion of focus as firms adjust to opportunities created by changing conditions. However, given increasing technological interconnectedness and global economic interdependencies, firms may better leverage their knowledge of such factors to improve international business investment decisions. We hypothesize how firms seeking international expansion adjust based on changes in their environment through both the frequency and value of their cross-border M&A (CB M&A) activity. Our findings from a sample of pre- and post-CB M&A activity using data on the 2008–2009 financial crisis outline how firms’ strategic international business decisions incorporate knowledge and uncertainty regarding country and global economic fluctuations.

Trends in climatically driven extreme growth reductions of Picea abies and Pinus sylvestris in Central Europe.

Extreme tree growth reductions represent events of abrupt forest productivity decline and carbon sequestration reduction. An increase in their magnitude can represent an early warning signal of impending tree mortality. Yet the long-term trends in extreme growth reductions remain largely unknown. We analyzed the trends in the proportion of trees exhibiting extreme growth reductions in two Central-European conifer species-Pinus sylvestris (PISY) and Picea abies (PCAB)-between 1901 and 2018. We used a novel approach for extreme growth reduction quantification by relating their size to their mean recurrence interval. Twenty-eight sites throughout Czechia and Slovakia with 1120 ring width series representing high- and low-elevation forests were inspected for extreme growth reductions with recurrence intervals of 15 and 50years along with their link to climatic drivers. Our results show the greatest growth reductions at low-elevation PCAB sites, indicating high vulnerability of PCAB to drought. The proportions of trees exhibiting extreme growth reductions increased over time at low-elevation PCAB, decreased recently following an abrupt increase in the 1970-1980s at high-elevation PCAB, and showed nonsignificant trends in high- and low-elevation PISY. Climatic drivers of extreme growth reductions, however, shifted over time for all site categories as the proportion of low-temperature-induced extreme growth reductions declined since the 1990s, whereas events caused by drought consistently increased in frequency during the same period. We observed higher growth volatility at the lower range of distribution compared with the upper range margin of PISY and PCAB. This will undoubtedly considerably impact tree growth and vitality as temperatures and incidence of drought in Central Europe are expected to further increase with ongoing climate change.

Firms’ exports, volatility and skills: Evidence from France

This paper studies the effects of globalization on the employment growth volatility by investigating the relationship between firms’ export intensity and labor demand volatility across skills. Based on detailed firm-level administrative French data for the period 1996–2007, we show that firms with intense export activity exhibit lower volatility of labor demand for skilled, compared to unskilled workers. Both the theoretical and empirical analysis point to the importance of skill-intensive fixed export costs in explaining this effect. Our identification strategy is based on an instrumental variable approach to provide evidence of causal effects. Our findings show that a higher level of export intensity increases the employment growth volatility for unskilled relative to skilled workers.

FERTILITY DECLINE AND SOCIO-ECONOMIC UNCERTAINTY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES AFTER 1990

ABSTRACT How do changes in socio-economic uncertainty affect fertility? For the Central and Eastern European1 1 In this group of countries, there are usually included: Albania, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, FYR Macedonia, the Republic of Moldova, Montenegro, Poland, Romania, the Russian Federation, Serbia, Slovakia, Slovenia, and Ukraine. In our study, we limit the group to the EU members, namely to 11 countries. (CEE) countries, the literature considers economic uncertainty as a determinant factor, among others, for explaining the fertility decline after the fall of the communist regime. In this paper we evaluate the theoretical framework proposed in literature and empirically analyse the relationship between socio-economic uncertainty and fertility in the CEE countries, by using several measures of uncertainty and controlling for social and demographic variables. Employing the panel methodology for national data between 1990 and 2018, we analyse the cross-country and time variation impact of female employment, unemployment, and output growth volatility upon fertility.

Causality between Energy Consumption and Economic Growth in the Presence of Growth Volatility: Multi-Country Evidence

Falling energy intensity (increasing efficiency) is believed to be a result of more efficient production methods that have evolved over time, indicating overall sustainability in the production process. The objective of this study is to investigate the diminishing trend of energy intensity and the related volatilities in growth of energy consumption and income growth through the energy–growth nexus. The country specific long-run and short-run causal relationships among real energy consumption per capita, real GDP per capita, and the volatilities of growth in income and the growth in energy consumption are established using the method proposed by Yamamoto–Kurozumi within a cointegration framework in 48 countries. The overall findings suggest that energy intensity is falling, in conjunction with the existing evidence on the energy–growth nexus in most of the countries studied; hence, implicitly this confirms sustainability. The results based on volatility analysis show a significant decrease in energy use in response to increasing income growth volatility. The negative effects of income growth volatility on energy consumption are usually countered through compensation measures, with subsidies provided to households and producers in order to smooth the energy consumption behaviours in those economies.

Economic complexity and poverty in developing countries

AbstractThis article examines the effect of economic complexity on poverty in developing countries. It shows that greater economic complexity results in lower poverty headcount rates. This is particularly the case for countries that enjoy higher economic growth rates, lower levels of income inequality and lower degrees of economic growth volatility, including volatility due to smaller export demand and financial flows shocks. These findings have important policy implications for those developing countries that are exploring ways and means to recover from the current COVID‐19 pandemic crisis and to prepare for future crises.

Time‐Varying Dynamics of the German Business Cycle: A Comprehensive Investigation*

AbstractThis paper provides insights into the time‐varying dynamics of the German business cycle over the last five decades. To do so, I employ an open‐economy time‐varying parameter VAR with stochastic volatility, which I estimate by quasi‐Bayesian techniques. The reduced‐form analysis reveals substantial shifts in the variables’ long‐run growth rates and shock volatilities over time. German trend inflation has strongly decreased and settled at a historically low level. GDP growth volatility exhibits marked fluctuations over time and has dropped to historically low levels only after the global financial crisis. The structural analysis employs externally identified oil supply shocks along with a recursive identification scheme to identify key macroeconomic shocks. The analysis reveals strong fluctuations in both the impact responses of macroeconomic aggregates to these shocks and the shock propagation processes. Thus, I conclude that business cycle stabilization in Germany is driven by both good policy and good luck.

The impact of inward FDI on output growth volatility: A country-sector analysis

While existing literature points to a positive impact of FDI on host countries’ growth, little is known about how inward FDI contributes to economic volatility in the host country. In this paper, we investigate the FDI-output growth volatility nexus focusing on manufacturing sectors of OECD countries over the period 1990 to 2015. We document a positive and statistically significant relationship between inward FDI stock and sectoral output volatility. We also show that the impact of inward FDI stock in downstream activities on volatility is larger compared to that of inward FDI stock in upstream activities which is not significant. Additionally, we find that the positive relationship between FDI and volatility is stronger in high capital-intensive industries. These results are robust to the use of a measure of FDI targeting practices.

Tax revenue instability and tax revenue in developed and developing countries

Purpose This paper aims to explore the effect of non-resource tax revenue instability on non-resource tax revenue in developed and developing countries. Design/methodology/approach The analysis has used an unbalanced panel data set of 146 countries over the period 1981–2016, as well as the two-step system generalized methods of moment approach. Findings The empirical analysis has suggested that non-resource tax revenue instability influences negatively non-resource tax revenue share of gross domestic product. The magnitude of this negative effect is higher in less developed countries than in relatively advanced countries. This negative effect materializes through public expenditure instability: non-resource tax revenue instability exerts a higher effect on non-resource tax revenue share as the degree of public expenditure instability increases. Finally, non-resource tax revenue instability exerts a higher negative effect on non-resource tax revenue share as economic growth volatility rises, inflation volatility increases and terms of trade instability increases. Research limitations/implications The main policy implication of this analysis is that policies that help ensure the stability of non-resource tax revenue also contribute to improving countries’ non-resource tax revenue share. For example, governments’ measures that help cope with or prevent the severe adverse effects of shocks on economies (shocks that could translate into higher tax revenue instability) would ultimately help enhance countries’ tax revenue performance. Practical implications The severity of the current COVID-19 pandemic shock (which is a supply and demand shock) and the macroeconomic uncertainty that it has generated – inter alia, in terms of economic growth instability, terms of trade instability, inflation volatility and public expenditure instability – are likely to result in severe tax revenue losses. Governments in both developed and developing countries would surely learn from the management of this crisis so as to prepare for possible future economic, financial and health crises with a view to dampening their adverse macroeconomic effects, including here their negative tax revenue effects. Originality/value To the best of the author’s knowledge, this topic is being addressed in the empirical literature for the first time.

The impact of output volatility on CO2 emissions in Turkey: testing EKC hypothesis with Fourier stationarity test.

This study uses the output volatility–augmented environmental Kuznets curve (EKC) model to determine the dynamic short- and long-term impacts of the volatility of economic growth (VOL) on carbon dioxide (CO2) emissions in Turkey from 1980 to 2015. The results of the autoregressive distributed lag (ARDL) approach indicate that there is a long-run relationship between CO2, per capita real GDP, per capita energy use, and VOL. The coefficients obtained from the ARDL estimation indicate that economic growth and energy use increase CO2 emissions, while VOL decreases CO2 emissions in the long run. Moreover, the coefficients obtained from the ARDL error correction model show that VOL decreases CO2 emissions in the short run, as well. We also find that the EKC is valid in Turkey. This implies for the Turkish case that achieving macro-stability under a “just transition” is key for achieving both economic and environmental benefits from ratifying international agreements such as Paris Agreement and EU Green Deal.

Does digital financial inclusion moderate or exacerbate output volatility?

ABSTRACT Fintech, broadly encompassing financial innovations enabled by digital technology, has seen phenomenal growth across emerging and developing economies (EMDEs) over the last few years. While the fintech revolution can facilitate broader financial inclusion and spur overall economic growth, concerns have been raised about the possible impact of fintech on growth volatility. Using a selected heterogeneous panel of 40 EMDEs spanning 2009 to 2017 we find that greater digital financial inclusion persistently exacerbates output volatility, although this result holds true only in countries with low banking concentration. Our results are robust to both different definitions of digital financial inclusion and alternative methodologies controlling for potential endogeneity.

Manufacturing decline and house price volatility

Using a new dataset of all Swedish housing transactions over the 2009-2017 period, we find that manufacturing's share of employment is positively associated with house price growth volatility and negatively associated with risk-adjusted capital gains. Both effects appear to be related to manufacturing's impact on firm concentration and employment volatility. Moreover, they imply that the manufacturing decline since 1970 could account for a 35% reduction in house price volatility.

Measuring business-level expectations and uncertainty: survey evidence and the COVID-19 pandemic

Utilizing a unique firm-level survey in Japan that contains five-bin forecasts for sales, we document three findings. First, firm-level subjective uncertainty is highly and positively related to volatility of past firm growth. Second, there are substantial variations in subjective uncertainty across firms, with a long right tail with extremely high subjective uncertainty. In addition, firms that have exposure to international businesses either through international trade or foreign direct investment have both higher average expected sales and subjective uncertainty. Finally, the sudden escalation of the COVID-19 pandemic in January–February 2020 led to a substantial increase in firms’ subjective uncertainty. Our triple-difference estimation results show that this effect is especially large for firms that have direct exposure to China through international trade and foreign direct investment.

Wealth Rheology.

We study wealth rank correlations in a simple model of macroeconomy. To quantify rank correlations between wealth rankings at different times, we use Kendall’s and Spearman’s , Goodman–Kruskal’s , and the lists’ overlap ratio. We show that the dynamics of wealth flow and the speed of reshuffling in the ranking list depend on parameters of the model controlling the wealth exchange rate and the wealth growth volatility. As an example of the rheology of wealth in real data, we analyze the lists of the richest people in Poland, Germany, the USA and the world.

A business case for democracy: regime type, growth, and growth volatility

ABSTRACT I present a business case for democracy, focusing on the impact of democracy on economic growth. This relationship is widely studied, and results have been less robust for growth than many other development outcomes such as literacy or infant mortality. I discuss four factors pertaining to data quality and modelling choices, suggesting that several previous studies have underestimated the growth-benefits of democracy. I further discuss the relationships between democracy and economic crises and variation in economic performance. By mitigating abysmal economic outcomes and ensuring more stable performance, democracy is generally of benefit to risk-averse entrepreneurs, investors, workers, and consumers alike.

The micro and macro of managerial beliefs

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not overoptimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise: they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1% to 6.8% of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5% to 2.3% relative to the rational-expectations equilibrium. These findings suggest overreaction could amplify asset-price and business-cycle fluctuations.

Why firms stop introducing innovations in the great recession: aggregate demand, financial constraints and risk

PurposeWith Spanish Community Innovation Survey data, this paper tests two main hypotheses as explanation of the fall in business innovation output in the Great Recession: the aggregate demand effect (firms have lower propensity to initiate innovation projects in recession than in contraction from demand-pull and profit expectations effects) and the risk effect (a greater proportion of the initiated projects fail in recessions than in expansions).Design/methodology/approachThe research methodology consists on first modelling the decision by firms to initiate innovation projects in t or not (probit model), and, second, modelling the outcomes, success or failure in t + 1 of firms that decide to initiate (Heckman model).FindingsThe empirical results support the two hypotheses. They also indicate that the sensitivity of the decision to initiate innovation projects to the aggregate demand is more pronounced among financially constrained firms than among unconstrained ones, while the risk effect appears to be independent of the financial situation of firms.Research limitations/implicationsThe results of the research are limited by not being able to follow up individual innovation projects, and by not having available a more representative sample of firms where non-innovators and potential innovators are represented (now is biased toward potential innovators).Practical implicationsThe results highlight the importance of macroeconomic stability for sustained business innovation output over time and calls managers’ attention in better management of innovation risk.Social implicationsThe results of the paper recommend macroeconomic polies aimed at the stabilization of aggregate demand and smoothing the business cycle, as a way to contribute to the stabilization of the growth of innovation output over time. Monetary and fiscal policies that smooth the business cycle will then have significant effects in the stabilization of innovation output and, in turn, in the reduction of volatility of economic growth over time. Increasing the direct public financial aid to undertake innovation projects in recession periods will not have the same innovation output stabilization effect than the stabilization of the aggregate demand. The reason is that, as the paper points out, the innovation output of financially unconstrained firms is also affected negatively by the contraction of aggregate demand in recession periods.Originality/valueThis paper is the first one to investigate the differences in business innovation outputs in expansions and recessions, separating the aggregate demand and the risk effect that the organisation for economic co-operation and development identifies as main determinants of the fall in innovation output during the Great Recession. The decomposition of firms’ innovation output in the decision to initiate innovation projects and the likelihood that those initiated succeed is also new in the literature.

Risk, uncertainty and the tourism sector of North Africa

AbstractThis paper investigates, for the first time, the uncertainty on the tourism of North Africa and uncertainty on the second‐degree effects of the North African tourism sector. The study uses data from 1995 to 2019 and a structural vector autoregression to perform the investigation. The research finds that uncertainties, measured by the uncertainty of Europe, the uncertainty of the Middle East and Central Asia, and the volatility of GDP growth of the Euro area, have significant negative effects on investment and job creation in, as well as the contribution to the GDP of, the North African tourism sector. The paper invents a new proxy of risk, measured by the volatility of crude oil production in North Africa, and finds that this new risk measure has a significant negative impact on the North African tourism sector. The results show that geopolitical risk and the uncertainty of Africa do not significantly affect the North African tourism sector. The paper suggests that policymakers in North Africa subsidize tourism‐related activities and explore new markets to attract tourists during periods of high risk and uncertainty.

The Link Between Output Growth and Output Growth Volatility: Barbados

This article investigates the effect of output volatility on output growth in Barbados, a small island developing state located in the Caribbean, based on data from 1976 through 2018. I conduct the analysis using the Stochastic Volatility in Mean model with time-varying parameters. The evidence suggests that output growth volatility, measured by stochastic volatility, negatively links with output growth at the aggregate level. I also examine disaggregate output data in order to understand this link better. The sectoral evidence suggests a positive link for services, a negative link for manufacturing, and a weak link for agriculture and the industrial sectors.