The Deep Historical Roots of Macroeconomic Volatility

We present cross-country evidence that a country’s macroeconomic volatility, measured either by the standard deviation of output growth or the occurrence of trend-growth breaks, is significantly affected by the country’s historical variables. In particular, countries with longer histories of state-level political institutions experience less macroeconomic volatility in post­war periods. In addition, we show that political instability, discretionary fiscal policy, financial underdevelopment, and a lack of foreign direct investment are the main mechanisms by which state history affects the macroeconomic volatility of modern states.