Output volatility and large output drops in emerging market and developing countries, Issues 2007-2114
International Monetary Fund, 2007 - Business & Economics - 32 pages
This paper establishes that output volatility and the size of output drops have declined across all countries over the past three decades, but remain considerably higher in developing countries than in industrial countries. The paper employs a Bayesian latent dynamic factor model to decompose output growth into global, regional, and country-specific components. The favorable trends in output volatility and large output drops in developing countries are found to result from lower country-specific volatility and more benign country-specific events. Evidence from cross-section regressions over the 1970-2003 period suggest that discretionary fiscal spending volatility, and terms of trade volatility together with exchange rate flexibility are key determinants of volatility and large output drops.
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Asia and China capita growth rate capita output growth CFA franc zone component of output countries Average country-component of output country-specific component cross-section regressions developing country regions discretionary fiscal policy discretionary fiscal spending discretionary government spending drops in emerging dynamic factor model East and North east Asia economic emerging market exchange rate flexibility exchange rate regime explanatory variables Fatas and Mihov financial sector development fiscal policy volatility franc zone countries GDP per capita global factor industrial countries instrumental variables regressions Kose large output drops Latin America market and developing Max Std Mean Min Max Middle East North Africa Otrok output fluctuations output volatility overall volatility procyclical real per capita regional factor South Asia standard deviation Sub-Saharan Africa CFA subperiod terms of trade trade shocks trade volatility Volatility and Output volatility and worst volatility in emerging volatility of discretionary volatility of output worst drop worst output drops