Output Volatility, Economic Growth, and Cross-Country Spillovers: New Evidence for the G7 Countries

This paper considers the linkages between output growth and output volatility for the
sample of G7 countries over the period 1958M2-2011M7, thereby paying particular attention
to spillovers within and between countries. Using the VAR-based spillover index approach by
Diebold and Yilmaz (2012), we identify several empirical regularities: i) output growth and
volatility are highly intertwined, with spillovers taking place into all four directions; ii) the
importance of spillovers has increased after the mid 1980s and reached unprecedented levels
during the recent financial and economic crisis; iii) the US has been the largest transmitter
of output and volatility shocks to other countries. Generalized impulse response analyses
point to moderate growth-growth spillovers and sizable volatility-volatility spillovers across
countries, suggesting that volatility shocks quintuplicate in the long run. The cross-variable
effects turn out negative: volatilty shocks lead to lower economic growth, growth shocks
tend to reduce output volatility. Our findings underline the increased vulnerability of the G7
countries to destabilizing shocks and their detrimental effects on economic growth, which are
sizeably amplified through international spillover effects and the associated repercussions.