Effects of growth volatility on economic performance – Empirical evidence from Turkey

This paper examines the relationship between growth and growth volatility for a small open economy with high growth volatility: Turkey. Quarterly data for the period from 1987Q1 to 2007Q3 suggests that growth volatility reduces growth and that this result is robust under different specifications. This paper contributes to the literature by focusing on how growth volatility affects a set of variables that are crucial for growth. Empirical evidence from Turkey suggests that higher growth volatility reduces total factor productivity, investment, and the foreign currency value of local currency (depreciation). Moreover, it increases employment, though the evidence for this is not statistically significant.

► The paper finds that growth volatility reduces growth. ► Total factor productivity and investment decrease with growth volatility. ► The domestic currency depreciates with growth volatility. ► Thus these three might be considered as transmission mechanisms to decrease growth. ► Growth volatility increases employment, though the statistical evidence is weak.