Sectoral volatility and regional growth in the European Union

I investigate the relationship between short-term instability and output growth in the European regions, using disaggregated data for six manufacturing activities over the period 1980 2006. The results show a positive link between sectoral volatility and growth. This finding is robust to the inclusion of additional explanatory variables in the analysis and is not driven by any specific sector or country. The observed relationship suggests that traditional stabilization policies that attempt to reduce the fluctuations of the business cycle may be harmful for regional growth in the long run.