Volatility and Growth

By Viktoria Hnatkovska, Norman V. Loayza. 2004

440 citations recorded by the source corpus.

The 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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b88ef773288aa06c3f1feb8f8446c07d931f4607

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Citations in the corpus

Capital account liberalization, free long-term capital flows, financial crises and economic development (2003, positive): “evidence that in both country groups the effects of a downturn fall disproportionately on the poor and on women [Singh and Zammit, 2000; Stiglitz, 1999; World Bank, 1998/99]. Turning to an investigation of purely economic costs, there are good analytical reasons to believe that economic crises would”
Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (2009, neutral): “For instance, Hnatkovska and Loayza (2005) present evidence that crisis volatility can explain an important part of the negative relationship between volatility and growth observed in middle-income economies.”
Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma (2010, positive): “Hnatkovska and Loayza (2005) find that macroeconomic volatility and long-run economic growth are negatively related, and that the negative link is considerably larger for the last two decades.”
China's Impact on Africa – The Role of Trade, FDI and Aid (2016, background): “Also, the diversification of Africa’s traditional trading partners could reduce export volatility, thereby decreasing output volatility and thus boosting long-run growth rates (Hnatkovska and Loayza, 2004).”
Reaping the Benefits of Financial Globalization (2008, background): “…domestic financial markets may be instrumental in moderating boom-bust cycles that could be triggered by sudden stops in financial flows (Aghion and Banerjee, 2005) and in efficiently allocating foreign financial flows to competing investment projects, thereby promoting economic growth…”
The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration (2010, methodology): “26 This investigation is motivated by Hnatkovska and Loayza (2005), who examines the nonlinear effect of structural variables, including financial development, on the output volatilitygrowth link.”
An Economic Vulnerability Index: Its Design and Use for International Development Policy (2009, background): “The same applies to the recent, systematic attempt by Hnathovska and Loayza (2004) to assess the link between output volatility and growth.”
Output Volatility and Openness to Trade: A Reassessment (2009, background): “To get a better sense of the relevance of this number, it is worth noting that Hnatkovska and Loayza (2003), using this same dataset, have estimated that a one standard deviation increase in output volatility leads to a 1.”