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Risk, Volatility, and the Global Cross-Section of Growth Rates

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Author Info
Craig Burnside
Alexandra Tabova

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Abstract

We reconsider the empirical links between volatility and growth between 1970 and 2007. There is a strong and significant correlation between individual country growth rates and global factors that are arguably exogenous with respect to their economies. The amount of volatility driven by these external factors is highly correlated, cross-sectionally, with the overall amount of volatility in GDP growth. There is also a strong correlation between a country's average growth rate and the magnitude and sign of its exposure to global factors. We interpret our findings as a partial answer to the question "Why doesn't capital flow from rich to poor countries?" We argue that low-income countries that grow slowly are riskier from the perspective of the marginal international investor.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15225.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15225

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
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  3. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June. [Downloadable!] (restricted)
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  4. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June. [Downloadable!] (restricted)
  5. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc. [Downloadable!]
  6. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March. [Downloadable!] (restricted)
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  7. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, Oxford University Press, vol. 14(2), pages 251-85, May. [Downloadable!]
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  8. Raddatz, Claudio, 2007. "Are external shocks responsible for the instability of output in low-income countries?," Journal of Development Economics, Elsevier, vol. 84(1), pages 155-187, September. [Downloadable!] (restricted)
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