Country Size and Economic Fluctuations

This paper investigates the character of business cycles across large and small economies. Empirically, G‐7 countries have less volatile investment, consumption, and trade balance ratios, higher correlations between domestic sacing and investment rates, and about the same correlation of the trade‐balance ratio and investment ratio as 68 smaller countries. These observations are consistent with a standard one‐sector two‐country general equilibrium model in which the only source of heterogeneity is country size. Since many developing countries are small, these findings suggest that even absent differences in markets and instutitions, economic fluctuations would be more severe in developing countries.