Sample Essay

Keynes (1936) refers to the negative relationship. He concludes that production volatility is taken into account when discussing new investments: higher production volatility mean higher risk, therefore fewer investments will be taken and output growth will decline. His work has been supported by other authors: Macri and Sinha (in the case of Australia,- 2000) whose mean equation states that the growth rate of GDP is negatively related to the conditional standard deviation; therefore, output volatility causes growth to be lower.

Meanwhile, Pindyck (1991) finds this relationship because of investment irreversibility which makes investments more sensitive to uncertainty and risk. Moreover, Henry and Olekans (2002) showed that GDP volatility is the highest when the economy is contracting. After recession the economy makes expansion but it’s speed is reduced by uncertainty in output. This uncertainty is the negative influence of recession. So producers cannot trust the future in this period.

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