Risk, Volatility, and the Global Cross-Section of Growth Rates
We reconsider the empirical links between volatility and growth between 1970 and 2007. There is a strong and significant correlation between individual country growth rates and global factors that are arguably exogenous with respect to their economies. The amount of volatility driven by these external factors is highly correlated, cross-sectionally, with the overall amount of volatility in GDP growth. There is also a strong correlation between a country's average growth rate and the magnitude and sign of its exposure to global factors. We interpret our findings as a partial answer to the question "Why doesn't capital flow from rich to poor countries?" We argue that low-income countries that grow slowly are riskier from the perspective of the marginal international investor.
We thank Jeremy Chiu, Martin Eichenbaum, Roberto Pancrazi, Sergio Rebelo, Michiru Sakane, and Marija Vukotic for comments and suggestions. Burnside is grateful to the National Science Foundation for financial support (SES-0516697). The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.