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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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