Volatility and Growth

doi:10.1017/CBO9780511510755.005

2 - Volatility and Growth

Published online by Cambridge University Press: 25 July 2009

Viktoria Hnatkovska and

Norman Loayza

Edited by

Joshua Aizenman and

Brian Pinto

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Viktoria Hnatkovska: Affiliation:
Ph.D. Candidate in Economics, Georgetown University
Norman Loayza: Affiliation:
Lead Economist Development Research Group, The World Bank
Joshua Aizenman: Affiliation:
University of California, Santa Cruz
Brian Pinto: Affiliation:
The World Bank

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Summary

ABSTRACT: This study examines the empirical, cross-country relationship between macroeconomic volatility and long-run economic growth. It addresses four central questions. The first is whether the volatility–growth link depends on country and policy characteristics, such as the level of development or trade openness. The second is whether the link reflects a causal effect from volatility to growth and, if so, whether this effect is statistically and economically significant. The third question concerns the stability of this relationship over time and, in particular, whether the relationship between volatility and growth has become stronger in recent decades. The fourth is whether the volatility–growth connection actually reveals the negative impact of crises, rather than the overall effect of cyclical fluctuations.

The study finds that indeed macroeconomic volatility and long-run economic growth are negatively related. This negative link is exacerbated in countries that are poor, institutionally underdeveloped, undergoing intermediate stages of financial development, or unable to conduct countercyclical fiscal policies. The study finds evidence that this negative relationship actually reflects the harmful effect from volatility to growth. Furthermore, the study finds that the negative effect of volatility on growth has become considerably larger in the last two decades and that it is due mostly to large recessions, rather than to normal cyclical fluctuations.

VOLATILITY AND GROWTH

In the last four decades, the 40 most volatile countries of the 79 sampled in this study have been developing economies (see Tables 2.1 and 2.2).

Type: Chapter
Information: Managing Economic Volatility and Crises
A Practitioner's Guide
, pp. 65 - 100

DOI: https://doi.org/10.1017/CBO9780511510755.005 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2005

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