Output volatility in developing countries

Abstract

Over the past few decades, many countries have experienced a marked decline in the volatility of output. However, there is still a significant difference between developed and developing countries in the level of output volatility. A proposed explanation for this phenomenon is the impact of economic policies on output volatility in developing countries. The empirical results reported in this study support this view. Trade openness and discretionary fiscal policy seem to increase volatility in developing countries, while the converse is true in developed countries. Furthermore, a flexible exchange rate regime is desirable to decrease volatility. However, many developing countries still use fixed rates for reasons such as a fear of floating, which contributes to volatility. The impact of monetary policy was found to be stabilising, but this could be the result of a favourable global economic environment. It should be noted, however, that uncontrollable factors such as financial systems and institutions play a vital role in all the above relationships.