Business cyle volatility and its relation with natural resources and country size

Abstract

Considering output volatility as an indicator for economic performance has been considered by many researchers. It has also been suggested by several studies namely Barlevy (2004) and Ramey and Ramey (1995) that volatility has negative effect on welfare and growth rate. Thus, the search for factors affecting business cycle volatility seems to be a worthwhile task. Sachs and Warner (1995) found a negative relation between natural resource endowment and growth, and Furceri and Karras (2008) have shown a negative effect of country size on business cycle volatility. This paper tries to investigate the effect of both factors on business cycle volatility. Using a panel of 101 countries from 1969-1970, it is shown that natural resource endowment has a positive effect on volatility and that smaller countries experience more business cycle volatility than larger countries. The results are robust to the choice of using HP or BP filter for detrending, different sample periods and estimation methods.