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The Volatility Curse: Revisiting the Paradox of Plenty

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  • Frederick van der Ploeg
  • Steven Poelhekke

Abstract

The volatility of unanticipated output growth in income per capita is detrimental to long-run development, controlling for initial income per capita, population growth, human capital, investment, openness and natural resource dependence. This effect is significant and robust over a wide range of specifications. We unravel the effects of volatility by opening the black box and conditioning the variance of growth shocks on several country characteristics. Natural resource dependence, physical and institutional barriers to trade and associated policy shocks increase volatility sharply and harm growth through this indirect channel. The robust indirect effect of natural resources through volatility trumps any direct effects on economic development, even if natural resource dependence is measured net of extraction costs. Financial development appears to mitigate the harmful causes of volatility. Our panel data estimation confirms our cross-country results, but we also offer evidence that well developed financial systems amplify the effect of short-term terms-of-trade volatility on macroeconomic volatility.�Â

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 206.

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Date of creation: Mar 2009
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Handle: RePEc:dnb:dnbwpp:206

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Keywords: volatility; growth; natural resource curse; financial development.;

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Cited by:
  1. World Bank, 2009. "Sudan - The Road Toward Sustainable and Broad-Based Growth," World Bank Other Operational Studies 3183, The World Bank.
  2. Eisgruber, Lasse, 2013. "The resource curse: Analysis of the applicability to the large-scale export of electricity from renewable resources," Energy Policy, Elsevier, vol. 57(C), pages 429-440.
  3. World Bank, 2009. "Sudan - Toward Sustainable and Broad-Based Growth," World Bank Other Operational Studies 3169, The World Bank.
  4. Marcelo Martinez & Montfort Mlachila, 2013. "The Quality of the Recent High-Growth Episode in Sub-Saharan Africa," IMF Working Papers 13/53, International Monetary Fund.
  5. Kurronen, Sanna, 2012. "Financial sector in resource-dependent economies," BOFIT Discussion Papers 6/2012, Bank of Finland, Institute for Economies in Transition.
  6. Vittorio Daniele, 2011. "Natural Resources and the 'Quality' of Economic Development," Journal of Development Studies, Taylor & Francis Journals, vol. 47(4), pages 545-573.

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