IS THERE VOLATILITY - GROWTH TRADE-OFF? THE CASE OF CROATIA – 1920 TO 2008

In this paper, we study the behaviour of the growth rate of real GDP per capita for Croatia over the period 1920–2008 from a different perspective in that we examine whether there is a common structural break in the growth rate time series. This paper empirically investigates some basic business cycle features, such as volatility, persistence, turning points, and the length of recessions and expansions in the growth rate of real GDP per capita. Conditional volatility is estimated using the Generalised Autoregressive Conditional Heteroscedastic (GARCH) model. Our main findings are that: (1) growth rate per capita experienced some structural breaks during the period covered and break intervals suggest that either one or a combination of events (establishment of new socialist government in 1946, the 1958 new legislation which stimulated industrialisation and the great slump after 1972 due to new inefficiency and management misbehavior) have contributed to the commonality of breaks in the growth rate per capita in Croatia; (2) the empirical results show that there were important events in some of the periods. The two big volatility spikes in 1952 and 1991 of the growth rate, (3) the effects of volatility on the growth rate in Croatia according to Black’s hypothesis of positive volatility – growth trade-off are found only in the model estimation with intercept dummy variables which control the volatility of output shock time series.