Output Volatility and Growth in Korea, China and Japan

The existing literature has shown that the relationship between output volatility and growth depends on data and/or estimation methods. In this paper, an empirical examination is made of the link between output volatility and growth in Korea, China and Japan, using monthly data on the index of industrial product from 1990 to 2009. Specifically, a country's growth and output volatility are measured by the ratio of change in industrial product and its conditional standard error, respectively. Using EGARCH-M model, provided by Nelson (1991), to accommodate the asymmetry of economic fluctuation, estimates indicates that output volatility is negatively and significantly associated with the growth in Korea. However, the relationship between output volatility and growth is positive and statically significant in China, whereas there exists very little evidence in Japan. Moreover, unexpected positive shocks have positive impacts on growth in Korea and China, whereas the impacts are very small in Japan. Regression results also suggest that the impacts of unexpected negative shocks on growth are negative in all countries, and the magnitude is the biggest in Korea and the lowest in Japan.