Volatility and development

Koren, Miklos and Tenreyro, Silvana ORCID: 0000-0002-9816-7452 (2005) Volatility and development. CEP Discussion Papers (706). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

Why is GDP growth so much more volatile in poor countries than in rich ones? We identify four possible reasons: (i) poor countries specialize in more volatile sectors; (ii) poor countries specialize in fewer sectors; (iii) poor countries experience more frequent and more severe aggregate shocks (e.g. from macroeconomic policy); and (iv) poor countries' macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in. We show how to decompose volatility into these four sources, quantify their contribution to aggregate volatility, and study how they relate to the stage of development. We document the following regularities. First, as countries develop, their productive structure moves from more volatile to less volatile sectors. Second, the level of specialization declines with development at early stages, and slowly increases at later stages of development. Third, the volatility of country-specific macroeconomic shocks falls with development. Fourth, the covariance between sector-specific and country-specific shocks does not vary systematically with the level of development. We argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk/
Additional Information:	© 2005 The Authors
Divisions:	Centre for Economic Performance Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O14 - Industrialization; Manufacturing and Service Industries; Choice of Technology E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Date Deposited:	06 Mar 2008 12:05
Last Modified:	01 Nov 2024 04:51
URI:	http://eprints.lse.ac.uk/id/eprint/3743

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