Volatility, Growth and Cycles

Publication date: 7 Aug 2012 | Publication type: Journal article/book/chapter | Theme: Macroeconomics | NIESR Author(s): Barrell, R; Holland, D; Liadze, I | Journal: Empirica No. 2 Vol. 36

The paper investigates the factors affecting the equilibrium level of output in a panel of European countries. Output depends on factor inputs and on the technology and the efficiency with which those factors are used. Efficiency may be driven by international conditions and institutional changes such as the Single Market Programme in Europe. The technology indicators used in this study depend upon research and development and also include the level of labour efficiency which is indexed on skills data. The level of the capital stock depends upon the user cost of capital, which may depend upon risk and hence on the volatility of the economy. Recent literature suggests that real exchange rate volatility is important in determining investment and therefore has an impact on equilibrium output. A link of this form is uncovered for the European economies. If policy can reduce these volatilities then it can also raise equilibrium output.

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