Medium-term macroeconomic volatility and economic development: a new technique

A key question in development economics is why developing countries as a collective group experience so much growth volatility. This paper introduces a new technique to measure medium-term macroeconomic volatility that is defined by the trend-growth volatility of output. It shows that medium-term volatility, sigma MT2, can be derived by subtracting the average short-term volatility, Sigma jn sigma Sj2, from the total variance of output growth, sigma LT2. Applying this new measure to the World Bank's output data reveals an inverted-U shaped relationship between medium-term volatility and economic development, indicating that economic development is likely to increase trend-growth volatility for emerging low-income countries.