Macroeconomic Volatility and Welfare in Developing Countries: An Introduction

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. Copyright The Author 2007. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / <sc>the world bank</sc>. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.