Time periods for averaging

It is common in growth empirics to use data which has been averaged over five year periods. So growth is measured as average annual growth over the periods 1980-4, 1985-9, 1990-4, and so on.

The idea is to remove some of the volatility from the data. I have my doubts that five year averaging should be used as widely as it is, in preference to shorter averaging over say three years or no averaging at all, for the following reasons:

1. Many interesting variables which could impact growth have only been collected in recent years, and data collection and empirical analysis may follow behind each other quickly. If five year averaging is used, then no time-series or panel data analysis may be possible.

2. Many estimation methods have biases which decrease with the number of time periods used. Using five year averaging for a wide set of countries means that only eight periods are used at most, which makes the data vulnerable to large biases.

3. Five year averaging is not a panacea for fluctuation removal. Longer term fluctuations remain in the data.