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Volatility and Development

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Author Info
Miklós Koren
Silvana Tenreyro

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Abstract

Why is GDP growth so much more volatile in poor countries than in rich ones? We identify three possible reasons: (i) poor countries specialize in fewer and more volatile sectors; (ii) poor countries experience more frequent and more severe aggregate shocks (e.g., from macroeconomic policy); and (iii) poor countries' macroeconomic fluctuations are more highly correlated with the shocks affecting the sectors they specialize in. We show how to decompose volatility into the various 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 volatility of country-specific macroeconomic shocks falls with development. Third, the covariance between sector-specific and countryspecific shocks does not vary systematically with the level of development. There is also some evidence that the degree of sectoral concentration declines with development at early stages, and increases at later stages. We argue that many theories linking volatility and development are not consistent with these findings, and suggest new directions for future theoretical work. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/qjec.122.1.243
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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 1 (02)
Pages: 243-287
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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:1:p:243-287

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cuñat, Alejandro & Melitz, Marc J, 2007. "Volatility, Labour Market Flexibility, and the Pattern of Comparative Advantage," CEPR Discussion Papers 6297, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Catia Batista & Jacques Potin, 2007. "Heckscher-Ohlin Specialization and the Marginal Product of Capital, 1976-2000," Economics Series Working Papers 357, University of Oxford, Department of Economics. [Downloadable!]
  3. Vatcharin Sirimaneetham, 2006. "Explaining policy volatility in developing countries," Bristol Economics Discussion Papers 06/583, Department of Economics, University of Bristol, UK. [Downloadable!]
  4. Fatás, Antonio & Mihov, Ilian, 2005. "Policy Volatility, Institutions and Economic Growth," CEPR Discussion Papers 5388, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Acharya, Viral V & Imbs, Jean & Sturgess, Jason, 2007. "Finance and Efficiency: Do Bank Branching Regulations Matter?," CEPR Discussion Papers 6029, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Koren, Miklós & Tenreyro, Silvana, 2007. "Technological Diversification," CEPR Discussion Papers 6523, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Galor, Oded & Michalopoulos, Stelios, 2006. "The Evolution of Entrepreneurial Spirit and the Process of Development," CEPR Discussion Papers 6022, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Sonia Bhalotra, 2007. "Spending to Save? State Health Expenditure and Infant Mortality in India," IZA Discussion Papers 2914, Institute for the Study of Labor (IZA). [Downloadable!]
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  9. Batista, Catia & Potin, Jacques, 2008. "International Specialization and the Return to Capital, 1976-2000," ESSEC Working Papers DR 08001, ESSEC Research Center, ESSEC Business School. [Downloadable!]
  10. Catia Batista & Jacques Potin, 2007. "Stages of diversification and specialization in an Heckscher-Ohlin world, 1976-2000," Economics Series Working Papers 356, University of Oxford, Department of Economics. [Downloadable!]
  11. Schclarek, Alfredo, 2006. "Industry Diversification, Financial Development and Productivity-Enhancing Investments," Working Papers 2006:19, Lund University, Department of Economics. [Downloadable!]
  12. Maria Giduskova & Borja Larrain, 2006. "International risk-taking, volatility, and consumption growth," Communities and Banking, Federal Reserve Bank of Boston. [Downloadable!]
  13. Eduardo Cavallo, 2007. "Output Volatility and Openness to Trade: A Reassessment," RES Working Papers 1033, Inter-American Development Bank, Research Department. [Downloadable!]
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