The Volatility Curse: Revisiting the Paradox of Plenty

35 Pages Posted: 20 Apr 2009

Date Written: April 2009

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, resource curse, financial development

JEL Classification: C12, C21, C23, F43, G20, O11, O41, Q32

Suggested Citation

van der Ploeg, Frederick and Poelhekke, Steven, The Volatility Curse: Revisiting the Paradox of Plenty (April 2009). CESifo Working Paper Series No. 2616, Available at SSRN: https://ssrn.com/abstract=1392136 or http://dx.doi.org/10.2139/ssrn.1392136

Frederick Van der Ploeg (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Steven Poelhekke

University of Auckland ( email )

Auckland
New Zealand

HOME PAGE: http://https://sites.google.com/site/stevenpoelhekke/

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