Growth Volatility and the Structure of the Economy

The aim of the chapter is twofold: (i) to propose a methodology to compute the growth rate volatility of an economy and (ii) to investigate the relationship between growth volatility and economic development through the lenses of the structural characteristics of an economy. We study a large cross-section of countries in the period 1970–2009, controlling for the stability of the estimates in two subperiods: 1970:1989 (Period I) and 1990:2009 (Period II). Our main findings are (i) the degree of trade openness has a destabilizing effect, while the degree of financial openness has not a significant effect; (ii) the size of the public sector displays a U-shaped relationship with growth volatility, but only in Period II; and (iii) the level of financial development has a negative effect on growth volatility, but only in Period I. Therefore, the dominant policy orientations in the recent decades contained emphasis on potential sources of instability, for example, on the increase in openness and on the reduction of the size of the public sector.