Hnatkovska, ViktoriaLoayza, Norman2013-06-112013-06-112003-08https://hdl.handle.net/10986/13853The authors study the empirical, cross-country relationship between macroeconomic volatility and long-run economic growth. They address four central questions: 1) Does the volatility-growth link depend on country and policy characteristics, such as the level of development or trade openness? 2) Does this link reflect a statistically and economically significant causal effect from volatility to growth? 3) Has this relationship been stable over time and has it become stronger in recent decades? 4) Does the volatility-growth connection actually reveal the impact of crises rather than the overall effect of cyclical fluctuations? The authors find that macroeconomic volatility, and long-run economic growth are indeed negatively related. This negative link is exacerbated in countries that are poor, institutionally underdeveloped, undergoing intermediate stages of financial development, or unable to conduct counter-cyclical fiscal policies. They find evidence that this negative relationship actually reflects the harmful effect from volatility to growth. Furthermore, the authors find that the negative effect of volatility on growth has become considerably larger in the past two decades, and that it is mostly due to large recessions rather than normal cyclical fluctuations.en-USCC BY 3.0 IGOACCOUNTINGAVERAGE GROWTHAVERAGE GROWTH RATEAVERAGE INCOMEBUSINESS CYCLEBUSINESS CYCLESCAPITAL INVESTMENTCAUSAL EFFECTCAUSAL IMPACTCOUNTRY AVERAGESCOUNTRY CHARACTERISTICSCOUNTRY DATADEPENDENT VARIABLEDEVELOPED COUNTRIESDEVELOPING COUNTRIESDEVELOPMENT COUNTRIESDOMESTIC CREDITECONOMIC CRISESECONOMIC DEVELOPMENTECONOMIC GROWTHECONOMIES IN TRANSITIONEMPIRICAL EVIDENCEEMPIRICAL GROWTH LITERATUREEMPIRICAL LITERATUREEMPIRICAL MODELSEMPIRICAL REGULARITIESEMPIRICAL RESULTSERROR TERMESTIMATION RESULTSEXCHANGE RATE MISALIGNMENTEXPLANATORY VARIABLESFINANCIAL DEPTHFINANCIAL DEVELOPMENTFINANCIAL MARKETSFINANCIAL SYSTEMSFISCAL CONSTRAINTSFISCAL POLICIESFISCAL POLICYGROWTH DETERMINANTSGROWTH EFFECTGROWTH LITERATUREGROWTH PERFORMANCEGROWTH PROCESSGROWTH RATEGROWTH RATESGROWTH REGRESSIONGROWTH REGRESSIONSHIGH INCOMEHUMAN CAPITALINCOME LEVELSINFLATIONINFLATION RATEINSTITUTIONAL WEAKNESSESINSURANCEINTERNATIONAL TRADELONG-RUN GROWTHLONG-RUN IMPACTLOW-INCOME COUNTRIESMACROECONOMIC INSTABILITYMACROECONOMIC SHOCKSMACROECONOMIC STABILIZATIONMEAN GROWTHNEGATIVE EFFECTNEGATIVE IMPACT0 HYPOTHESISOUTPUTOUTPUT GAPOUTPUT VOLATILITYPER CAPITA INCOMEPOOR COUNTRIESPURCHASING POWERREAL EXCHANGE RATERECESSIONSRICH COUNTRIESRULE OF LAWSIGNIFICANT EFFECTSTABILIZATION POLICIESSTANDARD DEVIATIONSTANDARD GROWTH DETERMINANTSSTRUCTURAL CHARACTERISTICSSYSTEMIC BANKING CRISESTERMS OF TRADETRADE OPENNESSTRADE SHOCKSTRANSITIONAL CONVERGENCEWorld Bank10.1596/1813-9450-3184