Medium-term macroeconomic volatility and economic development: a new technique

Sam Hak Kan Tang ()
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Sam Hak Kan Tang: The University of Western Australia

Empirical Economics, 2019, vol. 56, issue 4, No 4, 1249 pages

Abstract: Abstract A key question in development economics is why developing countries as a collective group experience so much growth volatility. This paper introduces a new technique to measure medium-term macroeconomic volatility that is defined by the trend-growth volatility of output. It shows that medium-term volatility, $$\sigma _{\mathrm{MT}}^2 $$ σ MT 2 , can be derived by subtracting the average short-term volatility, $$\left( {1/n} \right) \sum _j^n \sigma _{Sj}^2 $$ 1 / n ∑ j n σ Sj 2 , from the total variance of output growth, $$\sigma _{\mathrm{LT}}^2 $$ σ LT 2 . Applying this new measure to the World Bank’s output data reveals an inverted-U shaped relationship between medium-term volatility and economic development, indicating that economic development is likely to increase trend-growth volatility for emerging low-income countries.

Keywords: Medium-term macroeconomic volatility; Business-cycle volatility; Trend-growth breaks; Structural breaks; Economic fluctuations; Economic development (search for similar items in EconPapers)
JEL-codes: E32 O11 O47 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s00181-017-1385-4

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