The World Bank Economic Review Advance Access published online on September 16, 2009
The World Bank Economic Review, doi:10.1093/wber/lhp008
Macroeconomic Stability and the Distribution of Growth Rates
Correspondence: Email: vsirimaneetham{at}worldbank.org
JEL codes: O23, O40
It is often argued that macroeconomic instability can form a binding constraint on economic growth. Drawing on a new index of stability, threshold estimation is used to divide developing economies into two growth regimes, depending on a threshold level of stability. For the more stable group of countries, the output benefits of investment are greater, conditional convergence is faster, and measures of institutional quality have more explanatory power, suggesting that instability forms a binding constraint for the less stable group. Macroeconomic stability is also shown to dominate several other candidates for identifying distinct growth regimes.
Vatcharin Sirimaneetham is a consultant in the Poverty Reduction and Economic Management Network, East Asia and the Pacific Region, World Bank. Jonathan R.W. Temple (corresponding author) is a professor of economics at the University of Bristol; his email address is jon.temple{at}bristol.ac.uk. The authors are grateful to the journal editor, three anonymous referees, David Ashton, Holger Breinlich, Edmund Cannon, Huw Dixon, Jan Fidrmuc, Max Gillman, Andreas Leukert, and Patrick Minford for related comments or discussion as well as to seminar participants at the University of Bristol, Cardiff University, the 2006 Royal Economic Society Conference at Nottingham, and a Brunel University workshop at the Centre for Economic Development and Institutions on aspects of growth and macroeconomic policy. Temple thanks the Leverhulme Trust for financial support under the Philip Leverhulme Prize Fellowship scheme. A supplemental appendix to this article is available at http://wber.oxfordjournals.org/.