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Research background: Output volatility has potentially adverse consequences on the economy and the stabilizing role of fiscal policy is linked to the share of government size in an economy. Hence, given the relative large share of government in developing countries, government size is expected to play an important role in stabilizing output volatility. Purpose: This study examines the relationship between output volatility and government size in Nigeria. The study seeks to establish if government size mitigates output volatility in Nigeria. Research methodology: The study employs the Autoregressive Distributed Lag (ARDL) technique after conducting stationarity and co-integration tests. Results: The results of the ARDL estimate showed that government size lessens output volatility but the magnitude was insignificant. Further, the study found that volatility in aggregate government spending; international oil price and public debt were significant determinants of output volatility in Nigeria. Novelty: This showed that the automatic stabilization role of government size on output volatility could not be established. The automatic stabilization role of fiscal policy can be improved by increasing social security transfers (pension payment), payments of unemployment benefits and increasing civil servants minimum wage.

This study adopts a historical perspective to investigate variations in output volatility within and across world economies. The analysis uses annual data for 37 OECD and non-OECD countries covering the last two centuries. We focus on the relationship between inflation and output volatility. The results of a panel analysis show a positive effect of inflation on output volatility. This finding is consistent with the view that low inflation has a stabilizing effect on output volatility over the long term.

We analyze how trade affects aggregate volatility using a multi-country, multiindustry, and multi-destination framework. We decompose aggregate output growth risk into destination risk, origin risk, and idiosyncratic risk (and their covariances). We then use this framework to run counterfactuals changing the degree of destination market diversification (including home) and industry specialization. Using data on 19 industrial sectors, 34 countries, and 85 destination markets for the 1980-2011 period, we find that destination risk dominates, followed by idiosyncratic risk. From the counterfactuals, we find that the effect of increased destination market diversification is quantitatively important in reducing aggregate volatility for high volatility countries. On the other hand, reducing specialization increases volatility.

La presente tesis está desarrollada en tres capítulos que no están necesariamente conectados o presentan causalidad entre ellos, puesto que cada uno está motivado de forma individual y está autocontenido. El primer capítulo evalúa la hipótesis del cumplimiento de las expectativas racionales para las encuestas de tasas de interés de los bancos centrales de Brasil, Chile y Colombia. Concluye que no hay evidencia que sustente el cumplimiento de la hipótesis de expectativas racionales en las encuestas. El segundo capítulo analiza si la implementación del aprendizaje adaptativo en un modelo de ciclo de negocios estándar tiene un efecto diferenciado sobre la volatilidad y persistencia del producto según el mercado (laboral o financiero) de origen de dicho aprendizaje, calibrado para cifras observadas de los EE.UU. El estudio muestra la importancia del aprendizaje en el mercado financiero como factor que más contribuye a la volatilidad del producto por medio de la mayor volatilidad de la inversión, así como su capacidad de ajuste a las cifras observadas. El tercer capítulo analiza los efectos del aprendizaje de expectativas sobre dos modelos con fricciones financieras que presentan una visión específica más cercana a cómo funciona el mercado financiero en la realidad. En particular, se pregunta sí el aprendizaje de expectativas le agrega mayor volatilidad al producto en los modelos con fricciones financieras de Carlstrom et al (1997) y Carlstrom et al (1998) sin alterar la persistencia generada por estos modelos. Adicionalmente, los resultados muestran la relevancia del aprendizaje de expectativas en un mercado financiero con fricciones derivadas de la asimetría de información. Finalmente, se genera mejor ajuste a la volatilidad observada del producto para los EE.UU., asociada al mejor ajuste en la volatilidad observada de la inversión y de la tasa de retorno. This thesis is comprised by three chapters that are not necessarily connected or linked by causality between them, since each one is individually motivated and self-contained. The first chapter evaluates the hypothesis on meeting rational expectations on the interest rate surveys of the central banks of Brazil, Chile and Colombia. Based on a quantitative analysis, it concludes that there is no evidence to support the fulfillment of the rational expectations hypothesis in the surveys. The second chapter discusses whether the implementation of adaptive learning in a standard business cycle model has a differentiated effect on output volatility and persistence depending on the market (labor or financial) of origin of such learning, gauged for the observed U.S. figures. The study shows the importance of learning in the financial (capital) market as the factor that contributes the most to output volatility by way of increased investment volatility, as well as its ability to adjust to the observed figures. The third chapter analyzes the effects of learning expectations on two models with financial frictions, which present a specific vision which is closer to how the financial market actually works. In particular, it asks whether learning expectations adds greater volatility to the output in the models with financial frictions of Carlstrom (1997) and Carlstrom (1998) without altering the persistence generated by these models. Moreover, the results show the relevance of learning expectations in a financial market with frictions arising from information asymmetry. Lastly, a better adjustment to the observed output volatility for the U.S. is achieved, associated to a better adjustment in the volatility seen in both investment and rate of return.

This study examines the effect of environmental degradation on output volatility using spatial panel data models namely spatial lag model (SLM), spatial error model (SEM) and spatial Durbin model (SDM). For a comparative analysis, non-spatial models namely pooled OLS, fixed effects and random effects are also employed. Environmental degradation is proxied through carbon dioxide (CO2) emissions. The analysis is performed for 127 nations covering the period from 1996 to 2014. The findings reveal that environmental degradation increases output volatility in both non-spatial and spatial models. Furthermore, spillover effects of carbon emissions are positive and significant suggesting that national output volatility increases with the increase in adjacent economy’s carbon emissions. Further, the spatial parameters spatial rho and lambda are also positive and significant proving the arguments that output volatility in one specific location spillovers to the nearby neighbor and to the far away trading partner. These findings are robust to the use of methane emissions as an alternative environmental indicator. The findings suggest that to attain sustainable growth, regulatory authorities need to take actions for minimizing environmental degradation not only from its own country but also from the international community to control the environmental stress.

This study uses the output volatility–augmented environmental Kuznets curve (EKC) model to determine the dynamic short- and long-term impacts of the volatility of economic growth (VOL) on carbon dioxide (CO2) emissions in Turkey from 1980 to 2015. The results of the autoregressive distributed lag (ARDL) approach indicate that there is a long-run relationship between CO2, per capita real GDP, per capita energy use, and VOL. The coefficients obtained from the ARDL estimation indicate that economic growth and energy use increase CO2 emissions, while VOL decreases CO2 emissions in the long run. Moreover, the coefficients obtained from the ARDL error correction model show that VOL decreases CO2 emissions in the short run, as well. We also find that the EKC is valid in Turkey. This implies for the Turkish case that achieving macro-stability under a “just transition” is key for achieving both economic and environmental benefits from ratifying international agreements such as Paris Agreement and EU Green Deal.

This study is an endeavor to empirically examine the long run impact of financial globalization on output volatility in a balanced panel of selected 22 Asian countries (full sample) during 1998-2015. The disaggregated analysis is also conducted with respect to Central Asia, East Asia, South Asia and West Asia. The study uses System Generalized Method of Moments for estimation purpose. The results of the study reveal that in overall Asia and Central Asia, financial globalization has emerged as a significant and positive long run determinant of output volatility, whereas insignificance of financial globalization is reported in the context of three sub-samples i.e. East Asia, South Asia and West Asia during reference period. The empirical results appear to be strongly robust in terms of sign, significance and magnitude. To curtail Asia's output volatility this study calls for the use of selective and screened financial globalization during transition phase of building strong institutions. This study is noteworthy as it contributes to limited existing empirical literature on Asia's output volatility. It yields empirical estimates on subject matter in aggregated panel of Asia and in each disaggregated panel of Asia i.e. Central Asia, East Asia, South Asia and West Asia.

We thank the editor Mark M. Spiegel and two anonymous referees for excellent useful comments and suggestions that helped to improve this article. We would like to thank Maximo Camacho, Luciano Campos, Alessandro Galessi, Domenico Giannone, Daryna Grechyna, Carlos Thomas, Gabriel Perez-Quiros, Iryna Sikora, Francesco Zanetti and the participants at the 2018 ASSA meetings, the Econometric Society meeting of Latin American, the International Association for Applied Econometrics Conference, the VIII Zaragoza Workshop on Time Series Econometrics, and at the internal seminar series of the Banco de Espana for helpful comments and suggestions. The views expressed in this paper are those of the authors and are in no way the responsibility of the Banco de Espana or Eurosystem. Project PID2019-111708GA-I00 financed by MCIN/AEI/10.13039/501100011033., In this paper, we dissect the time-varying output volatility of the main world economies to study its dynamics, spillovers, and determinants, from a global perspective. Our analysis relies on a hierarchical volatility factor model and Bayesian model averaging. We show that the increasing comovement observed in international macroeconomic volatility is substantially larger in developing than in developed countries. Instead, developed countries have exhibited more asymmetric volatility shocks than developing countries in recent times. We also show that, although the downward trend in global volatility is related with increasing trade, idiosyncratic changes in volatility are highly influenced by domestic monetary policies. However, due to the declining role played by these idiosyncratic components over time, policymakers currently face greater constraints when it comes to stabilizing output fluctuations., Banco de Espana or Eurosystem PID2019-111708GA-I00 MCIN/AEI/10.13039/501100011033

This article investigates the long-run consequences of economic disasters. The results suggest the negative long-run effect of economic disasters on output growth and the limited empirical importance of the investment channel.

This paper empirically investigates if, in what direction, and under what circumstances financial inclusion amplifies or moderates output volatility, which is a matter of concern for monetary policymakers in emerging and developing economies (EMDEs). The empirical estimation for a large panel of over 100 EMDEs spanning the period 1995 to2013 finds a strong and persistent trade-off between higher financial inclusion and output stability. The paper also finds strong and robust evidence of non-linearity governing this relationship. Countries with high degrees of financial inclusion as well as those that are relatively lower income tend to experience a significant trade-off between financial inclusion and output stability. Further, the paper also finds that reckless financial inclusion coinciding with excessive credit growth tends to worsen output volatility. Refereed/Peer-reviewed

The 2007–2008 global financial crisis has spurred an increasing interest for investigating the financial and macroeconomic effects of the rare but extremely large economic crises, the so-called economic disasters. Current literature on the topic shows that probability of economic disasters plays an important role in the long-run effect of output volatility on investment. This paper investigates the long-run relationship between economic disasters and aggregate investment. We analyze the data for a large number of developing and developed countries after the World War II. The conducted panel data analysis indicates a negative effect of the probability of economic disasters on aggregate investment. Our results contribute to the recent literature on economic disasters by providing empirical support for the hypothesis that probability of infrequent but extremely large economic crises has a negative long-run effect on investment. We also find that the effect of ‘normal’ output volatility on aggregate investment is relatively small.

The purpose of this background note is to give an overview of the literature on output volatility and economic growth, assess output volatility and its impact in São Tomé and Príncipe (STP). This note is organized in four sections, besides this introductory part. The second section reviews the literature on the impact of output volatility on economic growth. The third section discusses different measures of volatility, calculating volatility for STP across different periods, and compares them to peer countries. The last section offers some policy recommendations. Output volatility and its relationship with growth have been a hot topic in economic research literature for a long time. There is significant controversy about how economic volatility1 affects economic growth. Although the link between economic growth and volatility is theoretically ambiguous, a negative impact of economic volatility on output growth dominates the empirical literature. This negative relationship also holds with newer and better datasets, advanced econometrics methodologies, and for specific country groups. There are three mains messages in this note. The first one is that volatility affects growth as supported by the literature review and the econometric estimations carried out in this note. The second one is that STP is a volatile country, although volatility of GDP growth and inflation has declined over time and are in line with peers. On the other hand, STP still faces higher volatility on current account balances and net lending and borrowing than its peers. The third message is that, on average, a fifty percent increase in volatility translates into a 25 percent decrease in GDP per capita growth rates. Finally, policy measures aimed at diversifying exports in terms of goods and markets, reduce the reliance on external finance and fiscal rules can help cushion the volatility and reduce its impact.

The paper investigates variations in output volatility in 38 OECD and non OECD countries over the last two centuries. Our tests reveal significant structural changes in output volatility in all countries. A more than 70% of detected structural changes indicates a reduction in volatility suggesting that output volatility has been declining over the last two centuries in general. The results, however, reveal different patterns of output volatility across countries.

Many objects of interest in economics and finance are not directly observable from available data. Nevertheless, these unobserved trends and events that are ‘hidden’ in economic and financial data bear relevance for policy makers and investors who want to assess the current state of the economy. This dissertation is a collection of four chapters that propose empirical models to shed light on some of these unobserved characteristics, i.e. macroeconomic volatility, crash risk and the cross-market transmission of shocks. Ultimately, the insights gained from these models can help to support the well-informed decision-making of policy makers and market participants.

This study examines the link between environmental indicators and output volatility unlike the previous literature that mainly emphasized the importance of carbon emissions and economic growth nexus. Output uncertainty is considered a serious global issue as it undermines economic gains and quality of life. This study scrutinizes the impact of greenhouse gas emissions on output volatility in 155 countries over the period 1971- 2017. The empirical analysis is based on Pooled Ordinary Least Squares, Random and Fixed Effects Models. The empirical results confirm that carbon dioxide (CO2), nitrogen oxide (NOX), methane (CH4), and total greenhouse gas (GHG) emissions are positively contributing to amplify global output volatility. Moreover, the Principal Component Analysis (PCA) of pollutant indicators also confirms the main results. Comparatively carbon emissions are contributing more to augment output volatility. A comparative analysis also reveals that all pollutants augment output volatility more in agricultural economies. The results of Granger causality confirm the bidirectional causality between environmental degradation and output volatility providing an evidence of endogeneity problem. To address it, the system GMM estimator is used by incorporating the instruments in output volatility model and the results of system GMM are also consistent with main findings. Findings of the study imply that a promising path of sustainable growth can be achieved by adopting the alternative ways of energy resources that produce less pollutant relative to greenhouse gasses.

By distinguishing between foreign direct investment (FDI) and portfolio and other investments (OTR), we study the effects of the composition of capital inflows on output volatility. We develop a simple empirical model which, under certain conditions satisfied in the data, yields three key testable implications. First, output volatility should depend positively on FDI and OTR volatility. Second, output volatility should be an increasing function of the correlation between FDI and OTR. Third, for low values of the FDI share, output volatility should be a decreasing function of the share of FDI in total capital inflows. We find strong support in the data for all three implications, even after controlling for other factors that may influence output volatility and dealing with potential endogeneity problems., Al distinguir entre inversión extranjera directa (FDI) e inversión de portafolio y otras inversiones (OTR), estudiamos los efectos de la composición de flujos de capital en la volatilidad del producto. Para eso, desarrollamos un modelo empírico simple donde, bajo ciertas condiciones satisfechas por los datos, pueden evaluarse tres implicancias clave. Primero, la volatilidad del producto debería depender positivamente en la volatilidad FDI y OTR. Segundo, la volatilidad del producto debería ser una función creciente de la correlación entre FDI y OTR. Tercero, para valores bajos de la participación de FDI, la volatilidad del producto debería ser una funci´on decreciente de FDI en los flujos totales de capital. Encontramos evidencia fuerte en los datos a favor de las tres implicancias, incluso luego de controlar por otros factores que pueden tener influencia sobre la volatilidad del producto y de lidiar con potenciales problemas de endogeneidad., Facultad de Ciencias Económicas

This study seeks to uncover the role played by the public sector wage premium in explaining the output volatility. Furthermore, the study also explores the factors that might substantiate the cross-country differences in the volatility of the public sector wage premium. Using cross-sectional regression analysis for the European Union countries, the findings indicate that more volatile public sector wage premium is associated with higher fluctuations in the private sector employment and less stable growth. Findings also suggest that volatility of the public sector wage premium tends to be larger in countries with smaller governments and in countries where collective bargaining is the predominant regime for public sector wage setting.

This paper provides a novel dataset of time-varying measures of fiscal counter-cyclicality for an unbalanced panel of advanced and emerging market economies from 1980 to 2014. The use of time-varying measures of fiscal counter-cyclicality overcomes the major limitation of existing studies assessing the determinants and the effects of fiscal counter-cyclicality that rely on cross-country regressions and, therefore, are not able to account for country-specific as well as global factors. The key findings of the paper are as follows: (i) fiscal counter-cyclicality has increased over time for many economies over the last two decades; (ii) fiscal counter-cyclicality is positively associated with financial deepening, the level of economic development, trade openness, government size as well as with political factors; (iii) fiscal counter-cyclicality significantly reduces output volatility. Our results are robust to various specifications and endogeneity checks. JEL codes: E62; H50; H60. Resumen Este documento ofrece un novedoso conjunto de datos con medidas de la contraciclicidad de la política fiscal que son variantes en el tiempo, para un panel desbalanceado de economías avanzadas y emergentes desde 1980 hasta 2014. El uso de medidas fiscales contracíclicas que cambian en el tiempo, supera la principal limitación de los estudios existentes sobre la materia, que usualmente evalúan los determinantes y los efectos de la contraciclicidad fiscal basados en regresiones a través de países y, por lo tanto, no dan cuenta de los efectos específicos por país ni de los efectos globales. Los hallazgos más importantes del trabajo son los siguientes: (i) la contraciclicidad fiscal ha aumentado durante las últimas dos décadas en muchas economías; (ii) la contraciclicidad fiscal está asociada positivamente con la profundización financiera, el nivel de desarrollo económico, la apertura comercial, el tamaño del gobierno, así como con factores políticos; y (iii) la contraciclicidad fiscal reduce significativamente la volatilidad del producto. Nuestros resultados son robustos a varias especificaciones y verificaciones de endogeneidad. Clasificación JEL: E62 H50 H60.

Doğalgaz piyasası günümüzde ulaştırma ve depolama yöntemlerini değiştirilmekte ve gelişmektedir. Çeşitli sektörlerdeki kullanım, doğalgaz ile petrolü ikame mal haline getirmekte, böylece doğal gaz piyasasındaki bu değişimler petrol fiyatı ve petrol fiyatındaki oynaklığa yansıyabilmektedir. Araştırmamızda arz ve talep yapısını gösteren ve doğalgaz ve petrol arasında geçişi yansıttığını düşündüğümüz dört farklı üretim ve tüketim oranı kullandık. Bu incelemeleri yaparken petrol fiyatlarındaki yoğun oynaklıktan dolayı ve doğalgazdaki değişimin koşullu varyans değişkeni üzerindeki etkisini incelemek için ARCH modeli kullandık. Çalışmamızda, doğal gaz üretiminde artış ya da petrol üretiminde azalmanın petrol fiyatındaki oynaklığın azalmasına neden olduğunu tespit ettik. Natural gas market has been developing and transportation and storage methods have been improving. Due to substitution between natural gas and oil in various sectors such as power generation, oil price and oil price volatility may reflect these changes in natural gas markets. We employ four ratios regarding the role natural gas markets. With these ratios, we successfully show that increase in production of natural gas or decrease in production of oil cause decline in oil price volatility with in a set of autoregressive conditional heteroscedasticity models. 61

This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth. It also examines the impact of credit on the composition of growth. The findings show that financial development smooths growth in gross domestic product and consumption per capita, but only up to a point. At high levels of credit, further credit is positively associated with volatility even after controlling for the quality of institutions and periods of financial crises. In large financial systems, finance may not help individuals smooth consumption volatility. The threshold at which finance's effect may be volatility enhancing may be lower than previously thought. In terms of the impact on growth, total credit (and credit to firms) has a nonlinear relationship, with rising credit supporting higher growth up to a point, beyond which the additional impact of finance on growth is negative. This can be explained by finance flowing into less productive activities (or drawing other resources into less productive activities). In addition, household credit is negatively related to manufacturing sector growth, although credit to firms has a positive relationship to manufacturing growth. This may be explained by the fact that much of household credit is used to finance the consumption (including imports) of goods and services broadly (not just manufacturing sector goods) or investment in housing.

Is government size the desirable response to macroeconomic risk, or it is the consequence of distorted political incentives with adverse effects on macroeconomic volatility? This paper reconsiders the mutual interdependence between government size and growth volatility in a large sample of countries within a system of simultaneous equations. We find that higher volatility is associated with larger government size and vice versa. Thus emphasis on government size as a mean capable, per se, of reducing macroeconomic risk is ill-conceived. We also identify a set of institutional limits to government discretion that also have beneficial effects on volatility. These include domestic political institutions, de facto central bank independence and a stable nominal exchange rate regime. © 2011 Elsevier B.V.

Korean Abstract: 생산량 변동성과 성장 간의 관계를 분석한 선행연구의 결과는 자료의 선택, 분석대상 국 가, 추정방법 등에 따라 매우 다양하며, 그 분석대상이 서구의 산업화된 국가에 집중됐다. 본 연구에서는 1990~2009년 기간의 월별 산업생산지수 자료를 이용해 한국ᆞ중국ᆞ일본 에서 생산량 변동성이 성장에 미치는 영향을 실증적으로 분석했다. 구체적으로 한 국가 의 경제성장률은 전년동기대비 산업생산증감률로, 그리고 생산량 변동성은 산업생산증 감률의 조건부 표준편차로 측정했다. 추정방법은 경기변동의 비대칭성을 고려해 Nelson (1991)이 제안한 EGARCH-M 모형을 사용했다. 추정결과 한국에서는 생산량 변동성이 성장에 통계적으로 유의한 음(-)의 영향을 미치는 것으로 관측된 반면 중국에서는 그 영향이 통계적으로 유의한 양( )의 값으로 추정됐다. 또한 일본에서는 생산량 변동성의 추정계수가 양의 값으로 관측됐지만, 전통적인 유의수준에서 통계적으로 유의하지 않게 나타났다. 또한 기대하지 못한 양의 충격이 발생할 경우 한국과 중국에서는 양의 효과 가 나타난 것으로 관측됐지만, 일본의 경우 그 효과가 상당히 미약했다. 그러나 기대하지 못한 음의 충격이 발생할 경우 한국ᆞ중국ᆞ일본의 모든 국가에서 음의 효과가 나타난 것으로 관측됐으며, 그 크기는 대체로 한국, 중국, 일본의 순서로 나타났다. English Abstract: The existing literature has shown that the relationship between output volatility and growth depends on data and/or estimation methods. In this paper, an empirical examination is made of the link between output volatility and growth in Korea, China and Japan, using monthly data on the index of industrial product from 1990 to 2009. Specifically, a country’s growth and output volatility are measured by the ratio of change in industrial product and its conditional standard error, respectively. Using EGARCH-M model, provided by Nelson (1991), to accommodate the asymmetry of economic fluctuation, estimates indicates that output volatility is negatively and significantly associated with the growth in Korea. However, the relationship between output volatility and growth is positive and statically significant in China, whereas there exists very little evidence in Japan. Moreover, unexpected positive shocks have positive impacts on growth in Korea and China, whereas the impacts are very small in Japan. Regression results also suggest that the impacts of unexpected negative shocks on growth are negative in all countries, and the magnitude is the biggest in Korea and the lowest in Japan.

In Japan, like many other industrialized countries, output volatility declined dramatically in the 1980s. In order to investigate the cause of this decline, we decompose the variance of output growth by frequency. Our important findings are: (1) The total variance of output growth decreased, which resulted from a reduction in the volatility at business-cycle frequencies; (2) At business-cycle frequencies, the variance of production fell by a larger percentage than did the variance of sales; and (3) In stark contrast, at high frequencies, the variance of production increased, while the variance of sales decreased. These features of production at different frequencies cannot be explained by changes in the sales process and cost-shock process. Instead, improved business practices—such as the adoption of the just-in-time technique—played a direct role in stabilizing the business cycles, while increasing output volatility at high frequencies. J. Japanese Int. Economies 23 (1) (2009) 1–19.

Our focus lies on the implications of recent monetary policy rules that operate under the zero lower bound. Time varying parameters show how changes in these parameters affect the impact of macroeconomic shocks. In addition to our analysis on the uncertainty that surrounds the economy within a zero lower bound regime. Our dissertation focuses on output uncertainty in an open economy; this is measured by the realized volatility. Chapter 1 proposes a New Keynesian Markov Switching model where the coefficient of risk aversion switches between high and low risk regimes. Risk aversion is of primary interest because when the nominal interest rate hits the zero lower bound (ZLB) in New Keynesian models, the coefficient of risk aversion becomes the sole determinant in the relationship between output and inflation expectations. Results yield that risk-aversion plays a crucial role in the impact of macroeconomic shocks. This is especially true when the economy is constrained by the ZLB. We find substantial asymmetric impact of positive versus negative macroeconomic shocks at the ZLB. Given that the Federal Reserve cannot lower the nominal interest rate below zero as a response to negative inflation and aggregate demand shocks. However, it is granted more flexibility to respond to positive shocks. In Chapter 2, we examine the impact of the zero lower bound (ZLB) on the uncertainty of personal consumption and money stock. We calculate the second conditional moments as a proxy for uncertainty. This chapter implements a multivariate GARCH model on U.S. personal consumption and real money balance from January 1980 to December 2014.Our main findings suggest that when constrained by the zero lower bound, consumption uncertainty declines. And, we note that real money uncertainty increases significantly. While the core of our dissertation thus far has focused on the implications of recent monetary policy rules that operate under the zero lower bound. Chapter 3 highlights our investigation into the impact of trade openness on output volatility and how this impact may be affected by the country's level of development. We use a panel data set for 33 countries for the years of 1980 through 2009. A standard deviation of quarterly real GDP over a 5-year span is used as the dependent variable. Controlling for the country and period-specific effects, the main results are as follows: trade openness increases the output volatility. And, the output volatility of countries with a higher level of development is less affected by trade openness.

Chapter 1 of this thesis studies the impact of the introduction of the euro on the volatility of industrial production growth and the characteristics of the optimal currency in the EU-12 countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain).Chapter 2 investigates the relationship between cross-border equity flows and relative international asset prices expressed in the same currency which can be considered as the Real Financial Market Exchange Rate (RFER). This chapter investigates cross-border equity flows between the US and a number of industrialized countries as well as a number of emerging markets. Chapter 3 is dedicated to the relationship between equity flows and the RFER between Canada and the US.

This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980–2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.

Economic development critically involves diversification and structural transformation—that is, the continued, dynamic reallocation of resources from less productive to more productive sectors and activities. This paper documents that, over an extended period, developing Asia has on average been particularly successful in diversifying its exports, particularly in comparison with Sub-Saharan Africa. Much of the progress has occurred through diversification along the ‘extensive margin,’ that is, through entry into completely new products. In addition, developing Asia has on average benefited significantly from quality upgrading, helping it capitalize on already existing comparative advantages. Yet, agricultural and natural resources tend to have lower potential for quality upgrading than manufactures. Therefore, for lower-income “frontier” countries, diversification into products with longer “quality ladders” may be a necessary first step before large gains from quality improvement can be reaped.

This paper presents new evidence on the patterns of cyclicality in the fiscal policy stance of developing and industrialized countries over a period of more than three decades covering 180 countries during 1980–2012. First, the paper considers issues of robustness in the choice of the proxy for fiscal cyclicality by using alternative filtering methods to check whether this influences the results and leads to any differences in a country’s reported within-period average, and across-period changes in fiscal stance. Second, a country-specific approach is used to split the sample into sub-periods based on a test for structural break in the series of real gross domestic product per capita. Third, the paper investigates the extent to which countries behave pro-cyclically or counter-cyclically in different phases of the business cycle. In line with earlier findings in the literature, the analysis confirms that there is a causal link running from stronger institutions to less pro-cyclical fiscal policy, even after controlling for the endogeneity of institutions and other determinants of fiscal policy.

Traditional measures of trade diversification only take into account contemporaneous export baskets. These measures fail to capture a country’s ability to respond to shocks by allocating factors of production into activities for which it has already paid the fixed costs associated with exporting. This paper corrects for the shortcoming of traditional measures of diversification by introducing a novel measure of trade diversification—latent diversification—and proposes a proxy to measure latent diversification, which is calculated by taking into account the entire history of a country’s exports. The paper shows that the observed gaps between traditional measures of diversification and the proposed proxy of latent diversification are sizeable; countries hold latent export baskets that are, on average, three times as large as their average contemporaneous export basket, and these gaps are largest for poor and small countries. Moreover, latent diversification is an important determinant of volatility—more diversified latent export baskets are associated with lower terms of trade volatility and, subsequently, lower GDP per capita volatility, even after controlling for the degree of contemporaneous export diversification and other trade and country characteristics. The latter result, together with the disproportionately large latent baskets relative to contemporaneous baskets observed in poor and small countries, suggests that latent diversification is an important vehicle toward stability in countries that face barriers in building diversified contemporaneous export baskets.

Predominant government behavior is decomposed by frequency into several periodic components: updating cycles of infrastructure, Kuznets cycles, fiscal policy over business cycles, and election cycles. Little is known, however, about the theoretical impact of such cyclical behavior in public finance on output fluctuations. Based on a standard neoclassical growth model, this study intends to examine the frequency at which public investment cycles are relevant to output fluctuations. We find an inverted U-shaped relationship between output volatility and length of cycle in public investment. This implies that periodic behavior in public investment at a certain frequency range can cause aggravated output resonance. Moreover, we present an empirical analysis to test the theoretical implication, using the U.S. data in the period from 1968 to 2015. The empirical results suggest that such resonance phenomena change from low to high frequency.

Traditional models of the choice of exchange rate regimes ignore the destabilizing effects of sharp and unanticipated exchange rate movements. Recent research, however, has shown that these movements have real costs in emerging markets owing to the dollarization of liabilities. This paper evaluates the performance of an emerging market economy under a credibly fixed rate, a collapsing fixed rate, and a flexible-rate regime using a speculative attack model that takes into account the real effects of unanticipated movements in exchange rates. The model is applied to South Korea to determine the dominant exchange rate regime.

Government is often considered the safe sector of an open economy that provides households with insurance against external risk exposure. Among highly integrated economies, however, households should be able to exploit common financial markets to insure themselves. In this paper we examine the relationship between government size, trade openness, and output volatility across fully integrated economies using Japan’s regional income accounting and public finance data. The contributions of the government- and market-based insurances to inter-regional risk sharing are also estimated. The empirical results reveal some unique aspects of the state-market interactions under full economic integration with vertical fiscal imbalance.

In this paper, we empirically investigate the link between forecasts transparency and macroeconomic volatility as measured by inflation and output growth volatility in developing economies. We adopt the quasi-random controlled experiments methodology that divides our sample of 49 developing countries into three categories on the basis of their forecasts transparency. The first category is composed of central banks that are completely opaque over our sample period. The second type of countries is constantly transparent about their forecasts over the period of study while the third category includes central banks that have recently started to disclose their forecasts. In contrast to the previous literature, we interestingly find that increasing forecasts transparency unambiguously leads to higher macroeconomic volatility in developing countries. Indeed, we find that both groups of countries that constantly disclose their forecasts and that have only recently started to disclose their forecasts experience an increase in their macroeconomic volatility compared to the remaining group of countries that are completely opaque. Our results however indicate that forecasts transparency may have some stabilizing effects if and only if it is practiced along with other forms of institutional transparency.

Eller M., Fidrmuc J. and Fungacˇ ova Z. Fiscal policy and regional output volatility: evidence from Russia, Regional Studies. This paper investigates the relationship between fiscal policy and output volatility in Russian regions between 2000 and 2009. Accounting for endogeneity between output volatility and fiscal developments by using system-generalized method of moments (GMM) estimation techniques, the results indicate that discretionary fiscal policy contributes to output volatility and induces macroeconomic instability at the regional level in Russia. This corroborates previous studies using cross-country data. To reduce business cycle fluctuations, it would be necessary to curtail procyclical fiscal activism at the regional level, e.g. via fiscal rules and sound institutions of fiscal federalism.

This paper investigates the relationship between fiscal policy and output volatility in Russian regions between 2000 and 2009. System GMM estimation techniques are used to account for potential endogeneity between output volatility and fiscal developments. Our main finding is that fiscal activism, proxied by various measures of discretionary fiscal policy, contributes to output volatility and so induces macroeconomic instability at the regional level in Russia. This result corroborates previous studies using cross-country data. To reduce business cycle fluctuations, it would be necessary to curtail pro-cyclical fiscal activism at the regional level, e.g. via fiscal rules and sound institutions of fiscal federalism.

This thesis investigates why and how macroeconomic volatility in source countries interacts with their FDI outflows. The study focuses on FDI flowing out from OECD countries to less developed countries in the ASEAN region. Using a panel data encompassing 52 country-pairs over the period 1996-2011, I find a negative correlation between FDI outflows and macroeconomic volatility in source countries. More specifically the empirical results suggest an adverse relationship between inflation and output volatility (business cycles fluctuations) and FDI flows – the more macroeconomic volatility in developed economies the lesser FDI flows to less developed economies, which is explained by Keynesian theories. These findings derive from a gravity model approach, which enabled me to control for host country determinants. In order to estimate these relationships I adopted a random effects model and a tobit model. The reason behind the use of these two models derives from the different views within this branch of research because of censored FDI statistics. The thesis is inspired by Éric Rougier’s et al. work on how macroeconomic volatility in European countries interacts with FDI flows to the MENA region (2012).

The objective of the paper is to offer a critique on the theoretical and empirical literature on inflation targeting (IT). It seems to exist a consensus in the theoretical literature that this monetary regime reduces both inflation and output volatility, mainly through building monetary policy credibility. When the role of the exchange rate is discussed, while there are some arguments that, as an instrument, it should not be explicitly stated in the central-bank loss function, theoretical arguments and evidence are still mixed as regards the effectiveness of exchange-rate management under IT. On the empirical front, the paper concludes that despite the fact that the work on IT in the last two decades has been immense in quality and quantity, still there is no quantitatively-credible study for the developing world, let alone a study that appropriately measures the regime switch from one monetary strategy to another.

Mestrado em Economia A institucionalização da União Económica e Monetária traduziu-se num ponto de viragem na condução da política orçamental na Europa. Contudo, este ganho de relevância tem gerado algumas dúvidas quanto à capacidade da discricionariedade em estabilizar as flutuações cíclicas, nomeadamente quando confrontada com as regras orçamentais. O objectivo deste trabalho passa então por analisar a relação entre a política orçamental discricionária e os ciclos económicos. Por afectar não só a sustentabilidade no longo prazo, mas também a estabilização macroeconómica, a ciclicidade da política orçamental discricionária constitui um elemento chave para compreender essa relação. Numa análise ao grupo de países da zona euro, para o período de 1995 a 2010, é detectado um padrão tendencialmente acíclico ou contra-cíclico da política orçamental discricionária. Esta relação é robusta a diferentes medidas do ciclo económico. No entanto, o comportamento da política orçamental discricionária também tem impacto sobre a volatilidade macroeconómica. The institution of Economic and Monetary Union has changed the conduct of fiscal policy across Europe. Nevertheless, this gain of relevance has brought some doubts about the effectiveness of discretion in cushioning cyclical fluctuations, especially when compared to fiscal rules. The main purpose of this study is to analyse the relation between discretionary fiscal policy and business cycles. By affecting not only the long-term sustainability but also the output stabilization, the cyclicality of discretionary fiscal policy is a central feature to understand that relation. The analysis for euro area countries, over the period 1995 to 2010, finds that discretionary fiscal policy tends to be acyclical or countercyclical. This relation is robust to different measures of business cycles. However, the responsiveness of discretionary fiscal policy to business cycles has itself an impact on macroeconomic volatility.

Cette thèse s’articule autour de trois chapitres indépendants qui s’inscrivent dans les champs de la macroéconomie, de l’économie monétaire et de la finance internationale. Dans le premier chapitre, je construis un modèle néo-keynesien d’équilibre général sous incertitude pour examiner les implications de la production domestique des ménages pour la politique monétaire. Le modèle proposé permet de reconcilier deux faits empiriques majeurs: la forte sensibilité du produit intérieur brut aux chocs monétaires (obtenue à partir des modèles VAR), et le faible degré de rigidité nominale observé dans les micro-données. Le deuxième chapitre étudie le role de la transformation structurelle (réallocation de la main d’oeuvre entre secteurs) sur la volatilité de la production aggregée dans un panel de pays. Le troisième chapitre quant à lui met en exergue l’importance de la cartographie des échanges commerciaux pour le choix entre un régime de change fixe et l’arrimage à un panier de devises. "Household Production, Services and Monetary Policy" (Chapitre 1) part de l’observation selon laquelle les ménages peuvent produire à domicile des substituts aux services marchands, contrairement aux biens non durables qu’ils acquièrent presque exclusivement sur le marché. Dans ce contexte, ils procèdent à d’importants arbitrages entre produire les services à domicile ou les acquerir sur le marché, dépendamment des changements dans leur revenu. Pour examiner les implications de tels arbitrages (qui s’avèrent être importants dans les micro-données) le secteur domestique est introduit dans un modèle néo-keyenesien d’équilibre général sous incertitude à deux secteurs (le secteur des biens non durables et le secteur des services) autrement standard. Je montre que les firmes du secteur des services sont moins enclin à changer leurs prix du fait que les ménages ont l’option de produire soit même des services substituts. Ceci se traduit par la présence d’un terme endogène supplémentaire qui déplace la courbe de Phillips dans ce secteur. Ce terme croit avec le degré de substituabilité qui existe entre les services produits à domicile et ceux acquis sur le marché. Cet accroissement de la rigidité nominale amplifie la sensibilité de la production réelle aux chocs monétaires, notamment dans le secteur des services, ce qui est compatible avec l’évidence VAR selon laquelle les services de consommation sont plus sensibles aux variations de taux d’intérêt que les biens non durables. "Structural Transformation and the Volatility of Aggregate Output: A Cross-country Analysis" (Chapitre 2) est basée sur l’évidence empirique d’une relation négative entre la part de la main d’oeuvre allouée au secteur des services et la volatilité de la production aggrégée, même lorsque je contrôle pour les facteurs tels que le développement du secteur financier. Ce resultat aggregé est la conséquence des développements sectoriels: la productivité de la main d’oeuvre est beaucoup plus volatile dans l’agriculture et les industries manufacturières que dans les services. La production aggregée deviendrait donc mécaniquement moins volatile au fur et à mesure que la main d’oeuvre se déplace de l’agriculture et de la manufacture vers les services. Pour évaluer cette hypothèse, je calibre un modèle de transformation structurelle à l’économie américaine, que j’utilise ensuite pour générer l’allocation sectorielle de la main d’oeuvre dans l’agriculture, l’industrie et les services pour les autres pays de l’OCDE. Dans une analyse contre-factuelle, le modèle est utlisé pour restreindre la mobilité de la main d’oeuvre entre secteurs de façon endogène. Les calculs montrent alors que le déplacement de la main d’oeuvre vers le secteur des services réduit en effet la volatilité de la production aggregée. "Exchange Rate Volatility under Alternative Peg Regimes: Do Trade Patterns Matter?" (Chapitre 3) est une contribution à la litterature économique qui s’interesse au choix entre divers regimes de change. J’utilise les données mensuelles de taux de change bilatéraux et de commerce extérieur entre 1980 et 2010 pour les pays membre de l’Union Economique et Monétaire Ouest Africaine (UEMOA). La monnaie de ces pays (le franc CFA) est arrimée au franc Francais depuis le milieu des années 40 et à l’euro depuis son introduction en 1999. Au moment de l’arrimage initial, la France était le principal partenaire commercial des pays de l’UEMOA. Depuis lors, et plus encore au cours des dix dernières années, la cartographie des échanges de l’union a significativement changé en faveur des pays du groupe des BICs, notamment la Chine. Je montre dans ce chapitre que l’arrimage à un panier de devises aurait induit une volatilité moins pronnoncée du taux de change effectif nominal du franc CFA au cours de la décennie écoulée, comparé à la parité fixe actuelle. Ce chapitre, cependant, n’aborde pas la question de taux de change optimal pour les pays de l’UEMOA, un aspect qui serait intéressant pour une recherche future., This thesis includes three independent essays in the fields of macroeconomics, monetary economics and international finance. In the first essay, I build a new Keynesian DSGE model to examine the implications for monetary policy of household production. The proposed theory helps reconcile the relatively strong response of output to monetary policy shocks as suggested by VAR-based evidence and the low degree of price rigidity found in micro data. The second essay analyzes the role of structural transformation (the reallocation of labor across sectors overtime) in shaping the volatility of aggregate output across countries. Finally, the third essay illustrates the importance of trade patterns in choosing between a single currency peg and a peg to a composite basket of currencies. “Household Production, Services and Monetary Policy” (Chapter 1) builds on the observation that consumer services (unlike consumer nondurable) have close substitutes at home. Households may therefore switch between consuming home and market service as the real wage (the opportunity cost of working at home) changes. To study the implications of this arbitrage for monetary policy, I embed a household sector into an otherwise standard two-sector (a nondurable good sector and a service sector) new Keynesian DSGE model. The fact that households are able to produce services at home makes service sector’s firms more reluctant to change their price. This translates into an extra endogenous shift term in the new Keynesian Phillips that is increasing with the extent of substitutability between home and market services. This increased nominal rigidity endogenously amplifies the output response to monetary policy shock, especially in the service sector, which is consistent with VAR-based evidence in the paper that consumer services are more interest-rate sensitive than consumer nondurables. “Structural Transformation and the Volatility of Aggregate Output: A Cross-country Analysis” (Chapter 2) is based on the evidence of a negative relationship between the employment share of the service sector and the volatility of aggregate output, which I obtain after controlling for several factors (including the level of financial development). This aggregate result is driven by sectoral labor productivity differentials: Labor productivity is substantially more volatile in agriculture and manufacturing than in services. Aggregate output would therefore become mechanically more stable as labor shifts away from agriculture and manufacturing, and toward the service sector. To quantify this conjecture, I first calibrate a model of structural transformation (secular reallocation of labor across sectors) to the U.S. economy, which I use to match the time path of labor shares in agriculture, manufacturing and services across OECD countries. The model is subsequently used to conduct a set of counterfactual experiments in which labor is endogenously constrained from moving across sectors. Computations suggest that the shift of labor toward the services sector is indeed volatility-reducing. “Exchange Rate Volatility under Alternative Peg: Do Trade Patterns Matter?” (Chapter 3) is a contribution to the literature on the choice of exchange rate regimes. I use monthly bilateral exchange rate and external trade data from 1980 to 2010 for the member countries of the Western African and Monetary Union (WAEMU). These countries have their common currency (the CFA franc) pegged to the French franc since the mid-40s and to the euro since its introduction in 1999. At the time of the initial peg arrangement, France accounted for most of the external trade of WAEMU countries. Since then, and more notably since the early 2000s, the trade patterns of these countries shifted briskly away from France and other Euro area countries and towards the BICs (China in particular). The chapter finds that a peg to a composite basket of currencies would have led to a less volatile effective exchange rate over the last decade compare to the current hard peg. This chapter, however, does not derive an optimal exchange rate for WAEMU countries, which is an important area for further research.

Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region.

This paper investigates empirically the effect of personal income tax progressivity on output volatility in a sample of OECD countries over the period 1982-2009. Our measure of tax progressivity is based on the difference between the marginal and the average income tax rate for the average production worker. We find supportive empirical evidence for the hypothesis that higher personal income tax progressivity leads to lower output volatility. All other factors constant, countries with more progressive personal income tax systems seem to benefit from stronger automatic stabilisers.

Çalışma, Türkiye ekonomisi için üretim değişkenliği ile uzun dönemli büyüme arasındaki ilişkiyi incelemektedir. Bu amaçla, üçer aylık GSYH, aylık sanayi üretim endeksi ve net elektrik tüketimi serilerinden yararlanılmıştır. Çalışmada büyüme serisi, logaritmik ve H-P trende göre olmak üzere iki şekilde elde edilmiştir. Üretim değişkenliği ve büyüme arasındaki ilişki, GARCH-M, TARCH-M ve EGARCH-M modelleri aracılığıyla incelenmiştir. Elde edilen sonuçlar, Türkiye ekonomisinde değişkenliğin büyümeyi negatif etkilediği ve bu etkileme sürecinde asimetrik etkinin tespit edilmediği yönünde sağlam ampirik kanıtlar sunmaktadır. Elde edilen bu negatif ilişki; iktisadi dalgalanmalar ve büyüme teorilerinin birbirinden bağımsız olarak ele alınmaması gerektiği sonucuna varmakta ve değişkenliği azaltmayı amaçlayan istikrar politikalarını uygulayan ve tavsiye eden IMF, Dünya Bankası, hükümetler ve merkez bankaları gibi kurumlara ampirik bir kanıt sunmaktadır. Ayrıca asimetrik etkinin istatistiksel olarak anlamlı olarak bulunmaması, politika uygulayıcı kurumların ekonomik kriz kadar aşırı büyümenin de zararlı olduğunu göz önünde tutmaları gerektiğini ortaya koymaktadır. This study investigates the relationship between output volatility and growth in Turkish economy. To this end, quarterly data for GDP, monthly industrial production index and electricity consumption series were used in the study. The growth series were obtained according to logarithmic and H-P trend. The relationship between output volatility and growth was investigated using the GARCH-M, TARCH-M and EGARCH-M models. In the light of the findings, robust evidence indicate that, for Turkish economy, volatility has a negative effect on growth and no evidence of asymmetry between output variability and growth has been found. The negative relationship obtained suggests that economic fluctuations and growth theories should not be studied separately and presents empirical evidence to the institutions which are committed to implementing and recommending stabilization policies in reducing volatility such as the IMF, the World Bank, governments and central banks. Moreover, the fact that the asymmetric effect has been found statistically insignificant brings policy-making institutions to consider that overgrowth is as harmful as economic recessions. 155

Using the "trilemma indexes" developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma - monetary independence, exchange rate stability, and financial openness - this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies' sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region.

This paper provides evidence for a significant relation between international financial markets' integration and output volatility. In the framework of a threshold model, it is shown empirically that this relation depends on country's financial risk. Financial risk indicates a country's ability to pay its official, commercial and trade debts. In countries with low financial risk, financial openness decreases output volatility, while, in countries with high financial risk, financial openness increases output volatility. Extensive robustness checks confirm this result.

This paper assesses the role of financial frictions and Foreign Direct Investment (FDI) on an economy´s growth rate, business cycle volatility, and firm´s capital structure. We gauge these effects within the Financial Accelerator framework, where entrepreneurs can establish affiliates of local firms abroad through Foreign Direct Investment. Model simulations suggest that in the presence of credit market imperfections FDI is associated with faster growth, less leverage, and lower aggregate volatility. These features are consistent with the macroeconomic dynamics of the more globally integrated economies over the last three decades.

This paper presents strong empirical evidence that automatic stabilizers and countercyclical fiscal policy decrease output volatility. The conducted empirical analysis proves the economic intuition that the automatic fiscal stance is countercyclical, regardless of the size and the prosperity of the economy. Connecting our empirical results to the Endogenous Growth Theory, we develop the idea that countercyclical fiscal policy boosts long-term economic growth. We conduct the study on two samples of countries – developed and developing. We recognize the fiscal policy pattern of the developed nations to be countercyclical, whereas the one of the developing countries to be acyclical. The derived results support our hypothesis that countercyclical fiscal policy reduces output volatility as the volatility of per capita output of the developed nations appear significantly less than the one of the developing countries. We identify possible determinants of fiscal policy in good and bad times. We empirically recognize that openness to trade, terms of trade, level of corruption and financial development affect fiscal policy in both samples of countries.

Recent academic research has questioned the role of economic policy as a determinant of long term growth rates. While there seems to be a correlation between several policy variables and growth rates, this correlation disappears when controlling for other factors. As an example, the significance of key economic policy variables such as inflation or government size disappears if we account for the quality of institutions. This paper looks at recent empirical research that questions the conclusion that macroeconomic policy does not matter for growth. By looking at the volatility of economic policy (whether it is fiscal policy or exchange rates), the authors find that policy is still a relevant and robust explanatory variable of cross country differences in economic growth. These results have strong policy implications. Improvements in the conduct of macroeconomic policy can have beneficial growth effects even if institutional reforms are not taking place. These results do not deny the importance of institutional reforms. By setting the right institutions one can ensure the proper conduct of macroeconomic policy without having to rely on the 'quality' of the decision maker.

This paper investigates the impact of institutions or structural policies on the volatilityof income or GDP per capita in transition countries and in Kazakhstan in particular. Inthe first part of the paper we compare Kazakhstan’s institutional framework with othertransition economies based on a broad range of indicators. Using factor analytical toolsto reduce the dimensionality of the indicator space we find that in general Kazakhstan’sinstitutional quality ranks among the lowest of the 24 transition countries investigated.Reform progress was mainly achieved in infrastructure. In the second part of the paperwe employ state-of-the-art Bayesian Model Averaging (BMA) to identify institutionaland macroeconomic policy areas that have the strongest impact on output volatility intransition economies. The analysis shows that good legal and administrative institutionscan help smooth output volatility. Moreover, we also find that inflation and currentaccount volatility and to a smaller extend exchange rate fluctuations are importantdeterminants of output volatility.

Recent academic research has questioned the role of economic policy as a determinant of long term growth rates. While there seems to be a correlation between several policy variables and growth rates, this correlation disappears when controlling for other factors. As an example, the significance of key economic policy variables such as inflation or government size disappears if we account for the quality of institutions. This paper looks at recent empirical research that questions the conclusion that macroeconomic policy does not matter for growth. By looking at the volatility of economic policy (whether it is fiscal policy or exchange rates), the authors find that policy is still a relevant and robust explanatory variable of cross country differences in economic growth. These results have strong policy implications. Improvements in the conduct of macroeconomic policy can have beneficial growth effects even if institutional reforms are not taking place. These results do not deny the importance of institutional reforms. By setting the right institutions one can ensure the proper conduct of macroeconomic policy without having to rely on the 'quality' of the decision maker.

This paper provides a comprehensive empirical assessment of the relation between the cyclicality of fiscal policy, output volatility, and economic growth, using a large cross-section of 88 countries over the period 1960 to 2004. Identification of the effects of (endogenous) cyclical fiscal policy is achieved by exploiting the exogeneity of countries' political and institutional characteristics, which we find to be relevant determinants of fiscal cyclicality. There are three main results: First, both pro- and countercyclical fiscal policy amplify output volatility, much in a way like pure fiscal shocks that are unrelated to the cycle. Second, output volatility, due to variations in cyclical and discretionary fiscal policy, is negatively associated with economic growth. Third, there is no direct effect of cyclicality of economic growth other than through output volatility. These findings advocate the introduction of fiscal rules that limit the use of (discretionary and) cyclical fiscal policy to improve growth performance by reducing volatility.