Sample Essay

The third relationship states that volatility has a negative impact on the growth rate – there is negative impact of output uncertainty. Henry and Olekans study this type of case for U.S. GDP data (2002). They use extended CDR-GARCH-M time-series model (CDR – current depth of recession). Their basic concern is how recession affects economic growth.  They say that recession has a significant effect on the dynamics of economic growth. Authors find that economic growth is greater just after the recession. Also it can be seen that the growth is offset by the negative relationship between economic growth and volatility. “The estimated conditional variance of output is highest in the periods following a negative innovation to growth and that this acts to dampen growth”. Therefore, there is a significant asymmetry in US growth rate (Henry and Olekans 2002).

Same association was found by Turnovsky and Chattopadhyay in 2002 for 61 developing countries. Their concern was developing countries which face imperfect world market. The higher volatility, the greater negative effect will be on the output growth. According to this relationship, authors state that as developing countries faces exactly higher volatility, it affects those countries more than developed. It means volatility in developing countries is very harmful for economic growth and developed countries are better off. One of the reasons is that the developed countries face less risk. For risk to have great results on the economy high degree of risk aversion must be taken (Turnovsky and Chattopadhyay, 2002). Their view is supported by Nazari and Mobarak (2010).

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