The Empirical Volatility-Growth Relationship: Is Economic Freedom the Missing Link?

This paper examines the role of economic freedom in the empirical relationship between business cycle volatility and long-run growth across countries. In a diverse sample of ninety-nine countries, accounting for economic freedom’s influence on volatility mitigates or even eliminates the negative impact of volatility on growth. Evidence also suggests that the impact of volatility on growth is not homogeneous across countries at different levels of freedom. In particular, volatility has a negative impact on growth only in countries at very low levels of economic freedom. Mixed results in previous studies suggested a more complicated relationship between volatility and growth, but there was no clear evidence that economic freedom was the missing link.