It is often argued that macroeconomic instability can form a binding constraint on economic growth. Drawing on a new index of stability, threshold estimation is used to show that developing countries can be divided into two distinct growth regimes, depending on a threshold level of stability. For the relatively stable group of countries, the output benefits of investment are greater, conditional convergence is faster, and measures of institutional quality have more explanatory power, suggesting that instability forms a binding constraint for the less stable group. It is also shown that macroeconomic stability dominates several other candidates for identifying distinct growth regimes.
Download the final version: sirimaneetham_temple_wber_final.pdf
An earlier version circulated as "Macroeconomic policy and the distribution of growth rates" and can be downloaded in its Bristol discussion paper version (March 2006).