Explaining Growth Volatility

Abstract

This paper sets forth a framework for thinking about growth volatility which is general enough to incorporate the important structural, institutional, and policy variations among countries which might account for differences in their macroeconomic performance. The paper focuses particularly on the role of the financial sector. The paper discusses the importance of short run dynamic effects in determining long run outcomes, and the role of the financial sector, elements which to date, have not been sufficiently incorporated in traditional macroeconomic analysis. The authors investigate the data, which reveal aspects of the determinants of volatility, namely the importance of the financial sector.