Volatility and Growth
40 Pages Posted: 20 Apr 2016
Date Written: December 2004
Hnatkovska and Loayza study the empirical, cross-country relationship between macroeconomic volatility and long-run economic growth. They address four central questions:
- Does the volatility-growth link depend on country and policy characteristics, such as the level of development or trade openness?
- Does this link reflect a statistically and economically significant causal effect from volatility to growth?
- Has this relationship been stable over time and has it become stronger in recent decades?
- 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 countercyclical 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.
This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the effects of volatility.
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