The Negative Growth-Volatility Relationship and the Gains from Diversification∗
نویسندگان
چکیده
We document a negative relationship between average growth and average volatility in a cross-section of countries. We then provide an interpretation of this result using a robustness (RB) version of the Obstfeld (1994) model of financial diversification and openness. Incorporating a preference for robustness can generate the observed negative relationship between growth and volatility of real GDP. Furthermore, we show that RB reduces the expected growth rate in the diversified equilibrium. Using this framework, we calculate the growth and welfare gains associated with financial market openness, and find that international integration has much larger impact on economic growth under RB. Welfare gains are larger for countries that face more model uncertainty. JEL Classification Numbers: C61, D81, E21.
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