An Empirical Analysis of Growth Volatility: A Markov Chain Approach

Summary

This paper studies the determinants of growth rate volatility, focusing on the effect of level of GDP, structural change and the size of economy. First we provide a graphical analysis based on nonparametric techniques, then a quantitative analysis which follows the distribution dynamics approach. Growth volatility appears to (i) decrease with per capita GDP, (ii) increase with the share of the agricultural sector on GDP and, (iii) decrease with the size of the economy, measured by a combination of total GDP and trade openness. However, we show that the explanatory power of per capita GDP tends to vanish when we control for the size of the economy.

We are very grateful to Carlo Bianchi, Eugene Cleur, three referees and seminar participants at Siena and Guanajuato for their comments. The usual disclaimers apply.