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Commodity Price Volatility and The Sources of Growth

Tiago Cavalcanti (), Kamiar Mohaddes () and Mehdi Raissi

No 597, Working Papers from Economic Research Forum

Abstract: This paper studies the impact of the level and volatility of commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We use the standard system GMM approach as well as a cross sectionally augmented version of the pooled mean group (CPMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970–2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth, operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of commodity terms of trade (CTOT ) volatility offset the positive impact of commodity booms; and export diversification of primary commodity- abundant countries contributes to faster growth. Therefore, we argue that volatility, rather than abundance per se, drives the “resource curse” paradox.

Date: 2011-01-07, Revised 2011-01-07
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Related works:
Journal Article: Commodity Price Volatility and the Sources of Growth (2015) Downloads
Working Paper: Commodity Price Volatility and the Sources of Growth (2012) Downloads
Working Paper: Commodity Price Volatility and the Sources of Growth (2011) Downloads
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