This paper attempts to set forth a framework for thinking about growth volatility which is general enough to incorporate the important structural, institutional, and policy variations among countries which might account for differences in their macroeconomic performance. And it focuses particularly on the role of the financial sector. The paper is divided into 2 sections. The first discusses the importance of short run dynamic effects in determining long run outcomes, and the role of the financial sector, elements which to date, have not been sufficiently incorporated in traditional macroeconomic analysis. The second looks at the data, which reveal some interesting aspects of the determinants of volatility, namely the importance of the financial sector.
William Easterly, Roumeen Islam, and Joseph E. Stiglitz
Annual World Bank Conference on Development Economics