Chapter 8: Cross-Country Evidence on the Link between Economic Volatility and Technical Progress
8. Cross-country evidence on the link between growth volatility and technical progress* Sam Hak Kan Tang INTRODUCTION Volatility in economic growth is generally recognized as a ‘stylized fact’ in the development of many industrializing countries. A number of studies have noted that many countries lack persistence in growth. Easterly et al. (1993), Pritchett (1998), Rodrik (1998) and Easterly and Levine (2000) find growth rates are highly unstable over time for a large number of countries and for subsets of countries with specific characteristics and geographic locations. Moreover, the recent financial crises in Latin America and East Asia provide vivid examples of volatility in growth among the newly industrializing countries (NICs). On the contrary, some NICs, such as Hong Kong and Taiwan, experience remarkably steady growth over a long period of time. Why, then, do some countries experience relatively steady growth, while others suffer wild fluctuations? Despite the widespread observation of volatility in growth, business cycle volatility has received little attention from mainstream economic research. It has been regarded as a less important area of research than studying economic growth, and therefore has been relatively neglected in both empirical and theoretical research. Lucas (1987), for example, has suggested that understanding business cycle volatility has little value compared to understanding growth. However, the arrival of a new class of models that link growth, volatility and technical progress in the early 1980s has helped to revive interest in business cycle volatility. Kydland and Prescott (1982), Nelson and Plosser (1982) and Long and Plosser...
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