Shaken and Stirred: Explaining Growth Volatility

"If there are two or more ways to do something, and one of those ways can result in a catastrophe, then someone will do it." The economic history of the world is replete with recessions and depressions. From the bursting of the British South Sea Bubble and the French Mississippi Bubble in 1720 (which at least one economic historian claims delayed the industrial revolution by 50 years) to the industrial depressions of the 1870s and 1930s, to the Latin American middle income debt crisis, African low income debt crisis, ex-Communist output collapse, and East Asian financial crisis, crises have been a constant of market capitalism. Add to that the collapses that have accompanied non-economic shocks like wars, hurricanes, earthquakes, volcanoes, fires, pests, droughts, and floods, and it is a wonder that anyone in the world has economic security. More recently, economic crises have often tended to go hand in hand with financial crises whose frequency and severity in developing countries has increased over the past quarter century. The causes and nature of these crises have differed. For example, those that characterized the debt crises of the 1980s were precipitated by profligate governments with large cash deficits and uncontrolled monetary policies. The more recent ones have occurred in countries which, for the most part,