Volatility and Growth

The authors study the empirical, cross-country relationship between macroeconomic volatility and long-run economic growth. They address four central questions: 1) Does the volatility-growth link depend on country and policy characteristics, such as the level of development or trade openness? 2) Does this link reflect a statistically and economically significant causal effect from volatility to growth? 3) Has this relationship been stable over time and has it become stronger in recent decades? 4) Does the volatility-growth connection actually reveal the impact of crises rather than the overall effect of cyclical fluctuations? The authors find that macroeconomic volatility, and long-run economic growth are indeed negatively related. This negative link is exacerbated in countries that are poor, institutionally underdeveloped, undergoing intermediate stages of financial development, or unable to conduct counter-cyclical fiscal policies. They find evidence that this negative relationship actually reflects the harmful effect from volatility to growth. Furthermore, the authors find that the negative effect of volatility on growth has become considerably larger in the past two decades, and that it is mostly due to large recessions rather than normal cyclical fluctuations.

Bibliographic Details

Main Authors:	Hnatkovska, Viktoria, Loayza, Norman
Language:	English en_US
Published:	World Bank, Washington, DC 2003-08
Subjects:	ACCOUNTING, AVERAGE GROWTH, AVERAGE GROWTH RATE, AVERAGE INCOME, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL INVESTMENT, CAUSAL EFFECT, CAUSAL IMPACT, COUNTRY AVERAGES, COUNTRY CHARACTERISTICS, COUNTRY DATA, DEPENDENT VARIABLE, DEVELOPED COUNTRIES, DEVELOPING COUNTRIES, DEVELOPMENT COUNTRIES, DOMESTIC CREDIT, ECONOMIC CRISES, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIES IN TRANSITION, EMPIRICAL EVIDENCE, EMPIRICAL GROWTH LITERATURE, EMPIRICAL LITERATURE, EMPIRICAL MODELS, EMPIRICAL REGULARITIES, EMPIRICAL RESULTS, ERROR TERM, ESTIMATION RESULTS, EXCHANGE RATE MISALIGNMENT, EXPLANATORY VARIABLES, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL MARKETS, FINANCIAL SYSTEMS, FISCAL CONSTRAINTS, FISCAL POLICIES, FISCAL POLICY, GROWTH DETERMINANTS, GROWTH EFFECT, GROWTH LITERATURE, GROWTH PERFORMANCE, GROWTH PROCESS, GROWTH RATE, GROWTH RATES, GROWTH REGRESSION, GROWTH REGRESSIONS, HIGH INCOME, HUMAN CAPITAL, INCOME LEVELS, INFLATION, INFLATION RATE, INSTITUTIONAL WEAKNESSES, INSURANCE, INTERNATIONAL TRADE, LONG-RUN GROWTH, LONG-RUN IMPACT, LOW-INCOME COUNTRIES, MACROECONOMIC INSTABILITY, MACROECONOMIC SHOCKS, MACROECONOMIC STABILIZATION, MEAN GROWTH, NEGATIVE EFFECT, NEGATIVE IMPACT, 0 HYPOTHESIS, OUTPUT, OUTPUT GAP, OUTPUT VOLATILITY, PER CAPITA INCOME, POOR COUNTRIES, PURCHASING POWER, REAL EXCHANGE RATE, RECESSIONS, RICH COUNTRIES, RULE OF LAW, SIGNIFICANT EFFECT, STABILIZATION POLICIES, STANDARD DEVIATION, STANDARD GROWTH DETERMINANTS, STRUCTURAL CHARACTERISTICS, SYSTEMIC BANKING CRISES, TERMS OF TRADE, TRADE OPENNESS, TRADE SHOCKS, TRANSITIONAL CONVERGENCE,
Online Access:	http://documents.worldbank.org/curated/en/2004/01/2877484/volatility-growth https://hdl.handle.net/10986/13853
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