The Volatility Curse and Financial Development: Revisiting the paradox of plenty

Frederick (Rick) van der Ploeg and Steven Poelhekke

No 24, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: The volatility of unanticipated output growth in income per capita is detrimental to long-run development, controlling for initial income per capita, population growth, human capital, investment, openness and natural resource dependence. This effect is significant and robust over a wide range of specifications. We unravel the effects of volatility by opening the black box and conditioning the variance of growth shocks on several country characteristics. Natural resource dependence, physical and institutional barriers to trade and associated policy shocks increase volatility sharply and harm growth through this indirect channel. The robust indirect effect of natural resources through volatility trumps any direct effects on economic development, even if natural resource dependence is measured net of extraction costs. Financial development appears to mitigate the harmful causes of volatility. Our panel data estimation confirms our cross-country results, but we also offer evidence that well developed financial systems amplify the effect of short-term terms-of-trade volatility on macroeconomic volatility.

Keywords: volatility; growth; natural resource curse; financial development (search for similar items in EconPapers)
JEL-codes: C12 C21 C23 F43 G20 O11 O41 Q32 (search for similar items in EconPapers)
Date: 2009-06-09
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:024

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