| Abstract: |
A growing body of recent macroeconomic evidence suggests that volatility is
detrimental to economic growth. The channels through which volatility affects
growth, however, are less clear; substantive evidence based on disaggregate
data is almost non-existent. This paper offers a framework in which policy
volatility has an adverse effect on firms' entry into productive industries,
thereby affecting economic growth. Empirical support for this relationship is
based on a detailed dataset of thousands of firms from some 80 countries.
Additional evidence is provided on the channels through which volatility
affects firm growth, showing that institutional obstacles magnify the effect. |