Knowledge Note

Do countries more exposed to macroeconomic volatility grow less than more stable nations? Are profligate governments more likely to exacerbate volatility? What about the role of the financial sector; are volatility, growth, government spending, and financial development correlated? Recent research reported confirms that an increase in volatility results in lower gross domestic product (GDP) growth and that the negative impact of volatility on growth is more pronounced in less financially developed countries and in countries where fiscal policy is more pro-cyclical. The challenges associated with macroeconomic volatility, smaller size, lack of scale economies, less diversified production structure, and tighter financial and fiscal constraints.