Reassessing Vulnerability to Macroeconomic Volatility: a nonstationary panel approach

The article examines the sensibility of economic growth to macroeconomic volatility, and the impact of financial development on volatility for a sample of 85 countries and OECD countries over two periods covering 1975 to 2006. In that purpose, we implented nonstationary panel techniques that account for cross-section dependence issue. We checked for the existence of a cointegrating relationship between variables. Finally we estimated such relationship using the Augmented mean group (AMG) method. We confirm the Ramey (1995) findings of the negative correlation between output growth and volatility for the full sample and the subsample of OECD countries, however our results are stronger for OECD countries. Moreover accounting for the interaction between volatility and financial development leads to stronger results. Indeed the interaction seems to impact positively on growth, but at the same times, it seems to magnify vulnerability to shocks.