Does Economic Diversification Impact On The Relationship Between Policies And Volatility

Author(s): Moore, Winston; Walkes, Carlon (2007)

Created 01 Jan, 2007
Categories Working Papers
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It is usually recommended that countries diversify their economies to guard against any negative shocks that might impact on one industry. However, previous research has not identified how diversification can impact on the effectiveness of macroeconomic policies. This paper attempts to evaluate the relationship between diversification, policies and economic volatility for a sample of 147 countries for the period 1970 to 2005. The study reports that more diversified countries tend to have lower rates of output, consumption and investment volatility. The effects of both expansionary monetary and fiscal policies are, however, enhanced in more diversified economies. In addition, while trade and capital account openness variables alone tend to diminish economic volatility, in relatively less diversified economies opening both the capital and trade account can kindle economic volatility.

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