- 11 November 2005
- WORKING PAPER SERIES - No. 551Details
- Why is GDP so much more volatile in poor countries than in rich ones? To answer this question, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. As in endogenous growth models, technological progress increases the number of varieties, raising average productivity. In our model, the expansion in the number of varieties provides diversification benefits against variety-specific shocks and it hence lowers the volatility of output. Technological complexity evolves endogenously in response to profit incentives. Complexity (and hence output stability) is positively related with the development of the country, the comparative advantage of the sector, and the sector's skill and technology intensity. Using sector-level data for a broad sample of countries, we provide extensive empirical evidence confirming the cross-country and cross-sectoral predictions of the model.
- JEL Code
- O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development
O14 : Economic Development, Technological Change, and Growth→Economic Development→Industrialization, Manufacturing and Service Industries, Choice of Technology
O41 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→One, Two, and Multisector Growth Models
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- ECB-CFS Research Network on "Capital Markets and Financial Integration in Europe"