Volatility, Growth and Aggregation¤

I revisit the relationship between growth and volatility in two di¤erent disaggregated data sets. I con...rm that growth and volatility are negatively related across countries, but show that across sectors, the relation is the opposite. This phenomenon, sometimes called “Simpson’s fallacy”, has a natural interpretation in the present context: it is the component of aggregate volatility that is common across sectors which correlates negatively with aggregate growth. Furthermore, while investment and volatility are unrelated in the aggregate, sectoral investment is shown to be more intense in volatile activities, as if the return to capital were higher there. These results call for a distinction between macroeconomic and sectoral volatilities, not unlike that between macroeconomics, where volatility is often understood as policy-driven instability, and ...nance, where volatility re‡ects risk, and thus commands high returns.