Why the Link between Volatility and Growth is both Positive and Negative¤

This paper uses international disaggregated data to investigate the link between volatility and growth. We ...nd the relationship to depend on the level of aggregation. At the sectoral level, volatility is associated with high growth. We use non-parametric methods to show that within activity volatility is typically associated with net entry and higher (total factor) productivity. This is consistent with the evidence that most of the process of creative destruction occurs within narrowly de...ned sectors, as surveyed in Caballero and Hammour (2000) or Davis and Haltiwanger (1998). Once sectoral data is aggregated at the country level however, the link becomes negative. We show how aggregation creates this discrepancy.