What Determines Macroeconomic Volatility? A Cross-Section and Panel Data Study

Abstract

This paper examines the determinants of the volatility in growth rates, seeking to expand on a very limited literature which has focused almost exclusively on financial determinants of volatility. An analysis of 41 variables and their effects on growth volatility yields some surprising results: the relationship between financial sophistication and volatility is not clearly positive as expounded in many studies, the oft cited negative relationship between real GDP per capita and volatility turns out to be positive, and there is no important relationship between inflation and volatility. The main policy implication for authorities is that intervention in most cases, whether in the form of trade and currency controls, or high government consumption, tends to exacerbate volatility.

Keywords: Macroeconomics,volatility,economic growth,variability,international economics,public policy,uncertainty

JEL Classification: E3, E5, E6