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

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  • Sam Hak Kan Tang

    (The University of Western Australia)

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.

Suggested Citation

  • Sam Hak Kan Tang, 2019. "Medium-term macroeconomic volatility and economic development: a new technique," Empirical Economics, Springer, vol. 56(4), pages 1231-1249, April.
  • Handle: RePEc:spr:empeco:v:56:y:2019:i:4:d:10.1007_s00181-017-1385-4
    DOI: 10.1007/s00181-017-1385-4
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    More about this item

    Keywords

    Medium-term macroeconomic volatility; Business-cycle volatility; Trend-growth breaks; Structural breaks; Economic fluctuations; Economic development;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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