Is British output growth related to its uncertainty? Evidence using eight centuries of data
| Published date | 01 July 2021 |
| Author | Don Bredin,Stilianos Fountas,Christos Savva |
| Date | 01 July 2021 |
| DOI | http://doi.org/10.1111/sjpe.12270 |
Scott J Polit Econ . 2021;68:345–364. wileyonlinelibrary.com/journal/sjpe
|
345
© 2021 Scottish Ec onomic Society
Accepted: 6 Janu ary 2021
DOI: 10 .1111/sjpe.1 2270
ORIGINAL ARTICLE
Is British output growth related to its uncertainty?
Evidence using eight centuries of data
Don Bredin1| Stilianos Fountas2| Christos Savva3
We thank two ano nymous refere es for helpful co mments and sug gestions. Al l remaining err ors are our resp onsibility. The a uthors grate fully
acknowled ge the support o f Science Founda tion of Ireland u nder grant numb er 16/SPP/3347.
1University College Dublin, Dublin 4, Ireland
2University of Macedonia, Thessaloniki,
Greece
3Cyprus Univer sity of Technology, Lima ssol,
Cyprus
Correspondence
Stilianos Foun tas, Departm ent of
Economics, U niversity of Maced onia,
Thessaloniki, Greece.
Email: sfountas@uom.gr.
Abstract
We examine the empirical relationship between output
variability and output growth for Britain using data for
eight centuries covering th e 1270 to 2014 period. Drawing
on the economic history literature, we split the full sam-
ple period into four sub periods and use GARCH models to
measure output growth uncertainty and estimate its ef-
fect on average growt h. Within each sub- sample, we allow
output growth to depend on the state of the system, for
example 2- regime switching model would switch between
high- growth and low- growth regimes. We find that t he ef-
fect of uncertainty on growth differs depending on the
existing growth regime. Low- growth regimes are asso-
ciated with a negative effect of uncertainty on growth,
and medium or high- growth regimes are associated with
a positive effect. These findings are consistent across
the four states of economic development. Our results
indicate why the empirical literature to date has found
mixed results when examining the effect of uncertainty
on growth.
KEYWORDS
output variab ility, output growth, GA RCH models, regime
switching
JEL CLASSIFICATION
C22; C51; C52; E32
346
|
BREDIN Etal.
1 | INTRODUCTION
Until the early 1980 s, macroeconomic theor ists treated the analysis of t he real business cycle (RBC) as se parate
from the study of economic growth. In the 1980s, three important contributions in business cycle theory by
Kydland and Prescot t (1982), Long and Plosser (1983) and Ki ng et al. (1988) integrated the theories of th e busi-
ness cycle and ec onomic growth in their mod els. However, these models did not co nsider the possibility t hat the
variability of t he business cycle might relate to th e rate of economic growth. Simila rly, for the most part, devel-
opments in growth theory have been made without consideration of the variability in the business cycle. The
scene has changed r ecently at both theoret ical and empirical fr ont. At the theoretica l level, Blackburn and Pe lloni
(2005) and a numb er of studies summarized by these a uthors examine how cyclical f luctuations might relate to
long- run economic growth . At the empirical level, stu dies by McConnell and Perez- Quiros (200 0) and Stock and
Watson (2002) hig hlight the importa nce of the reduction in US GD P growth volatility in th e last two decades and
its implicat ions for growth theor y. The early dichotomy in macro economic theory bet ween economic growt h and
the variabilit y of economic fluctuatio ns can be reconsidered in relat ion to several theoretical a pproaches. These
theories pre dict a positive, negati ve or no association bet ween the two variable s. The empirical evid ence, to date,
based on cross- sectional country stu dies, panel data studi es or time series analyse s of individual countries i s also
quite mixed. The co nflict in relation to the theo retical models, as well as th e mixed empirical finding s, is summa-
rized in Bakas et al. (2018). The theoretical and empirical ambiguity surrounding the RBC variability– economic
growth relati onship provides us with the m otivation to expand on the e mpirical aspects of t his issue.
We examine the ext ent and the importan ce of growth uncertaint y by employing a long span of an nual output
data for England/Gr eat Britain, that star ts in the 13th century and runs u p to the present. Our source of dat a is
Broadberr y et al. (2015) and Hills et al . (2010). The historical s etting has a number of a dvantages over the re latively
short samples adopted by existing studies in the literature. First, we are able to analyse the RBC variability–
growth relati onship over a period that sp ans a number of centuries , thus including in our an alysis periods of signif-
icant variatio n in output growth associated w ith famines (such as the Great Famin e of 1315– 17), major diseases
(such as the Black D eath of 1348– 49), wars (such as the N apoleonic wars an d the two world wars), eco nomic crises
(such as the Great Depression, the volatile 1970s) and periods of prosperity (such as the Great Moderation).1
Second, the us e of annual data allows us to perfo rm a more appropriate test of the B lack (1987) hypothesis that
predicts a p ositive effect of output var iability and uncerta inty on the growth rate of outp ut. Black's argument is
based on the resp onse of investment and outpu t growth to a change in uncert ainty regarding the prof itability of
investment projects and hence can be better tested in a study that uses low- frequency data (see Caporale &
McKiernan, 1998). Fin ally, our study is the first (as f ar as we are aware) to empirically e xamine the extent of eco-
nomic and in par ticular growth uncer tainty through th e lens of an economy moving from p rimarily agrarian st ruc-
ture to economic powerhouse during the First Industrial Revolution, to the decline in manufacturing during the
Second Industrial Revolution and the emphasis on services.
Our primar y focus is to examine the impact of grow th uncertainty on output growth. Gi ven the established
theoretica l literature, we focus solely on t he relationship between grow th uncertainty and ou tput growth.2 Our
methodological approach includes univariate GARCH models (both symmetric and asymmetric) and regime
1While previou s studies have hi ghlighted the li mited evidence o f economic grow th prior to the 17th ce ntury, see Craf ts and Mills (2017 ), we
examine a muc h larger sample o f data. Althou gh our chosen sa mple include s limited eviden ce of sustained e conomic grow th for the per- 17th
century, the re is ample evide nce of economic gr owth volatilit y. The interact ion between e conomic growt h and growth unc ertainty fo rms a
significa nt contributi on to our study. Furt her details on b oth economic gr owth and levels o f volatility wi ll be presented l ater in the empir ical results
section.
2Although t heoretical as w ell as empirica l studies have re ported ambig uous results , we nonethele ss have a solid theo retical foun dation in terms of
examining t he relationshi p between grow th uncerta inty and outpu t growth. The bu siness cycle m odels indicat e there should b e no influence, wi th
output grow th being deter mined by real fac tors such as tec hnological ch anges. An alte rnative is the en dogenous grow th caused by lea rning- by-
doing which sh ows that busine ss cycle volatil ity raises th e long- run growt h of the economy, see B lack (1987). Finally, acc ording to Berna nke (1983)
and Pindyck (1991), t he negative rela tionship bet ween output vol atility and gr owth arises fr om investment ir reversibilit y at the firm leve l.
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting