The Link Between Economic Volatility and Growth and the Risks of Stabilization Policy

Abstract Since the early 1980s, economic volatility has decreased sharply, and growth rates have declined marginally, especially in more recent years. The two phenomena are related, and a positive relationship between volatility and growth may be due to the cleansing effect of recessions. Should this be the case, stabilization policies have downsides because, if successful, they could lead to diminished growth. Using an autoregressive exponential GARCH-in-mean (ARMA-EGARCH-M) framework from 1959 to 2019, this paper highlights a positive relationship between economic volatility and growth. Using United States data, this framework shows that fiscal and monetary interventions are stabilizing, but over the long run they are detrimental to growth and prosperity.