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

We would like to thank Anita Akkas, Erla Anderson and Rana Nelson for their helpful suggestions. An earlier version of estimates for Turkey is published as a part of World Bank Country Memorandum for Turkey. The findings and conclusions in this paper are those of the authors and do not represent the views of the State Planning Organization of Turkey or the World Bank. All rights reserved. No part of this publication may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher. The findings, interpretations and conclusions expressed in this publication are entirely those of the author(s) and should not be attributed to the Economic Research Forum, members of its Board of Trustees, or its donors. Abstract 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, employment increases, however the evidence for this is not statistically significant.