Macroeconomic volatility and welfare in developing countries: An introduction

Abstract

Macroeconomic volatility, both a source and a reflection of underdevelopment, is a fundamental concern for developing countries. Their high aggregate instability results from a combination of large external shocks, volatile macroeconomic policies, microeconomic rigidities, and weak institutions. Volatility entails a direct welfare cost for risk-averse individuals, as well as an indirect one through its adverse effect on income growth and development. This article provides a brief overview of the recent literature on macroeconomic volatility in developing countries, highlighting its causes, consequences, and possible remedies. It then introduces the contributions of a recent conference on the subject, sponsored by the World Bank and Pompeu Fabra University, Barcelona. © The Author 2007. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development. All rights reserved.