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Volatility and development

Koren, Miklos and Tenreyro, Silvana (2005) Volatility and development. 5307. Centre for Economic Policy Research, London, UK.

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Identification Number: 5307

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 (Working Paper)
Official URL: http://www.cepr.org
Additional Information: © 2005 Miklós Koren and Silvana Tenreyro
Subjects: H Social Sciences > HD Industries. Land use. Labor
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Date Deposited: 03 Jun 2008 17:39
Last Modified: 10 Aug 2011 13:02
URI: http://eprints.lse.ac.uk/id/eprint/5312

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