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Volatility and Development

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Author Info
Miklos 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 four possiblereasons: (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 sectorsthey specialize in. We show how to decompose volatility into these four sources, quantify their contribution toaggregate volatility, and study how they relate to the stage of development. We document the followingregularities. First, as countries develop, their productive structure moves from more volatile to less volatilesectors. Second, the level of specialization declines with development at early stages, and slowly increases atlater stages of development. Third, the volatility of country-specific macroeconomic shocks falls withdevelopment. Fourth, the covariance between sector-specific and country-specific shocks does not varysystematically with the level of development. We argue that many theories linking volatility and developmentare not consistent with these findings and suggest new directions for future theoretical work.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0706.

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Date of creation: Nov 2005
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Handle: RePEc:cep:cepdps:dp0706

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Related research
Keywords: volatility specialization diversification development economic fluctuations.

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Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
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  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. 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!]
  6. 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:
  7. 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!]
  8. Koren, Miklós & Tenreyro, Silvana, 2007. "Technological Diversification," CEPR Discussion Papers 6523, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Schclarek, Alfredo, 2006. "Industry Diversification, Financial Development and Productivity-Enhancing Investments," Working Papers 2006:19, Lund University, Department of Economics. [Downloadable!]
  10. Maria Giduskova & Borja Larrain, 2006. "International risk-taking, volatility, and consumption growth," Communities and Banking, Federal Reserve Bank of Boston. [Downloadable!]
  11. 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)
  12. 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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  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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