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Output Volatility in Emerging Market and Developing Countries: What Explains the “Great Moderation” of 1970-2003?

Output volatility and the size of output drops have declined across groups of nontransition countries studied in this paper over the past three decades, but have remained considerably higher in developing countries than in industrial countries. The paper employs a Bayesian latent dynamic factor model to decompose output growth into global, regional, and country-specific components. The favorable trends in output volatility and large output drops in developing countries are found to have resulted from lower country-specific volatility and more benign country-specific events. Evidence from cross-section regressions over the 1970–2003 period suggests that the volatility of discretionary fiscal spending and terms of trade volatility together with exchange rate flexibility were key determinants of volatility and large output drops.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 59 (2009)
Issue (Month): 3 (August)
Pages: 229-254

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Handle: RePEc:fau:fauart:v:59:y:2009:i:3:p:229-255
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  1. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok, 2013. "Regionalization vs. Globalization," Koç University-TUSIAD Economic Research Forum Working Papers 1302, Koc University-TUSIAD Economic Research Forum.
  2. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  4. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  5. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  6. Sebastian Edwards & Eduardo Levy Yeyati, 2004. "Flexible Exchange Rates as Shock Absorbers," Business School Working Papers exchangerates, Universidad Torcuato Di Tella.
  7. Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1419-1447.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  9. Michael D. Bordo & Thomas Helbling, 2003. "Have National Business Cycles Become More Synchronized?," NBER Working Papers 10130, National Bureau of Economic Research, Inc.
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