Unveiling the influence of economic complexity and economic shocks on output growth volatility: evidence from a global sample

Abstract

While several studies have explored the impact of economic shocks on output volatility, little attention has been given to the role of a country’ productive knowledge in moderating such relationship. In this paper, we raise two unsettled questions: Does productive knowledge reduce the volatility of output growth? and Does it magnify or alleviate the impacts of economic shocks on output volatility? These two questions are answered by applying the system-generalized method of moments to a dataset of 122 countries from 1996 to 2019. The paper shows that high economic complexity is significantly associated with reduced output growth volatility. However, such beneficial effect only occurs in high- and upper middle-income countries. Economic complexity is also found to strongly moderate the relationship between terms of trade shock, inflation shock, and output growth volatility. Economic complexity significantly exacerbates the unfavorable effects of these two shocks on output growth volatility, especially in highly complex economies. The discovered inter-related relationship between economic complexity, shocks, and economic volatility suggests the policymakers to be cautious in the process of transforming their economies towards higher knowledge-intensive ones.