The University of Manchester Discussion Paper Series On the Relationship Between Growth and Volatility in Learning-by-Doing Economies

This paper contains an investigation into the potential linkages between the short-run (cyclical) and long-run (secular) movements in economic activity. The investigation is based on an analytically solvable stochastic monetary growth model in which learning-by-doing accounts for endogenous technological change. The dynamic general equilibrium of this model implies that both the ...rst and second moments of disturbances have ...rst-order e¤ects on both the ...rst and second moments of variables. Given this, it is shown that the correlation between the mean and variance of output growth depends fundamentally on two main factors the source of stochastic ‡uctuations (real shocks or nominal shocks) and the functioning of the labour market (wage ‡exibility or wage rigidity). These results contradict certain common presumptions and may help to explain certain empirical evidence.