How Robust is the Empirical Link between Business-Cycle Volatility and Long-Run Growth in OECD Countries?

It has been argued that business-cycle volatility dampens growth. This paper argues that this is no stylised fact. A review of the literature reveals that arguments in favour of no, or even a positive, impact of business-cycle volatility on growth are as convincing as the arguments pointing in the other direction. Empirical evidence using annual data for 24 OECD countries from 1960 to 2000, based on robust cross-country regressions and panel models, raises doubts about a clear negative impact of volatility on growth. Moreover, the hypothesis of Granger-non-causality of business-cycle volatility for growth cannot be rejected.