Financial Development, Shocks, and Growth Volatility (original) (raw)
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Financial Development and Economic Volatility: Does Finance Dampen or Magnify Shocks
2000
We extend the recent empirical literature on the link between financial development and economic volatility by focusing on the channels through which financial development impacts economic volatility. Specifically, we use a panel data set for 1960-97 and 63 countries to investigate whether a well-developed financial sector dampens the impact that the volatility of terms of trade changes, inflation and government expenditure has on the volatility of real per capita GDP growth rates. We find robust evidence that a higher level of financial development dampens the positive effect of the volatility of terms of trade changes on economic volatility, especially in high-income countries, while it magnifies the impact of inflation volatility in non-high income countries. We do not find a robust effect of finance on the volatility of government expenditures. These results are consistent with our model that predicts that real sector shocks are dampened in their effect on output volatility by a well developed financial sector, while monetary shocks are magnified and propagated through the financial sector.
Does Financial Development have an impact on Economic Growth and Economic Volatility ?
2023
This article's main purpose is to study the relationship between Financial Development, Economic Growth, and Economic Volatility. This article introduces the importance of Financial Development to Economic Growth and Economic Volatility, and then provides literature review of relevant prior research. Theoretical models are then construct different models for a panel data, such as: fixed effect models, nonlinear models, endogenous test, and logistic models. Empirical results confirms that while Financial Development stimulates economic growth, it can't prove the impact on Economic Volatility. It examines the reverse causality between Financial Development and Economic Growth, leading to the problem of endogeneity. On the other hand, it is also pointed out that the possibility of recession is increasing due to the Financial Development. Finally, it is presented practical policy recommendations for dynamic adjustment of monetary developments and some suggestions for further research.
Utilizing Arellano and Bond (1991) panel-GMM estimator model, this paper investigates dynamic interactions between financial system, through bank/stock market development, and economic growth volatility in overall/specific country group levels for 47 developed/developing/transition countries during 1989-2012 periods. Empirical results for the full sample of countries suggest that all variables, except stock market turnover ratio, have a statistically significant and negative impact on economic growth volatility, whereas domestic credit to GDP has a statistically significant but positive impact. This result may imply that it is the development of the stock market rather than the development of the banking sector that dampens the growth volatility
Economic growth, volatility and their interaction: What’s the role of finance?
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This paper examines the relation between financial depth and the interaction of economic growth and its volatility. We use a sample of 52 countries for the period 1980-2011, and our main finding is that, at moderate levels of financial depth, further deepening increases the ratio of average economic growth to volatility; however, as financial depth gets higher, this relation reverts, and the rise in volatility overcomes that of economic growth. This result is obtained both in the medium and long run; however, the peak of the relation seems to be lower in the medium run (domestic credit-to-GDP ratio around 40% to 55%) than in the long run (around 75% to 99%). This suggests that increasing the domestic credit-to-GDP ratio may intensify relative volatility in the medium term, but still may raise relative long-term growth before the long-run threshold is achieved.
Does financial development volatility affect industrial growth volatility?
International Review of Economics & Finance, 2014
This paper investigates whether volatility of financial development plays a role in determining industrial growth volatility. Three key findings emerge. First, overwhelming evidence supports the view that more volatile financial development raises the industrial volatility in sectors that rely more on external liquidity. Second, the harmful effect of financial volatility on industrial volatility mainly works through the increase in fluctuations of the growth of real value added per firm and the number of firms, with the former effect more prominent. Third, both the volatilities of the banking sector and the stock market positively associate with higher industrial growth volatility, which contrasts sharply with the finding in the existing literature that financial structure generally does not matter.
Financial Development and Output Volatility: A Cross-Sectional Panel Data Analysis
THE LAHORE JOURNAL OF ECONOMICS, 2018
This paper aims to provide a more comprehensive understanding of the impact of financial developments on output volatility. Using cross-sectional and panel datasets for 79 countries from 1961 to 2012, we find that financial expansion plays a significant role in mitigating output volatility, although the evidence is weak in some cases. The role of financial stability is more prominent than that of other measures of financial growth in mitigating output volatility. The volatility of terms of trade and inflation contributes positively to increasing output volatility. We also evaluate the channels through which financial developments can affect output volatility. Our model investigates the link between financial growth and output volatility through two potential channels, using four measures of financial development. The volatility of inflation and of terms of trade are used as proxies for monetary sector and real sector volatility, respectively. Financial development plays a mixed role...
Endogenous Financial Development, Growth and Volatility
The paper develops a model in which both long-run growth rates and credit market development are endogenous. Agents facing idiosyncratic pro- ductivity shocks cannot perfectly commit to repay their loans, but the threat of credit market exclusion specifies endogenous debt limits preventing de- fault in equilibrium. A growth push makes credit market participation more valuable and relaxes debt limits, reinforcing thereby the initial growth effect. Moreover, a dynamic complementarity between debt limits gives rise to multi- ple balanced-growth paths. A high-growth equilibrium with developed credit markets can coexist with one or two low-growth equilibria with underdevel- oped credit markets. Low-growth equilibria are more volatile as they are exposed to shocks to the wealth distribution and to sunspot shocks.
Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries
IMF Working Papers, 2019
This paper contributes to the literature by looking at the possible importance of the structure of the financial system-whether financial intermediation is performed through banks or markets-for macroeconomic volatility, against the backdrop of increased policy attention on strengthening growth resilience. With low income countries (LICs) being the most vulnerable to large and frequent terms of trade shocks, the paper focuses on a sample of LICs over the period - and finds that banking sector development acts as a shock absorber, dampening the transmission of terms of trade shocks to growth volatility. Expanding the sample to developing countries confirms this result, although this role of shock-absorber fades away as economies grow richer. Stock market development, by contrast, appears neither to be a shock absorber nor a shock amplifier for most economies. These findings are robust across fixed effect, System GMM and local projection estimates.
Financial development and growth: An empirical analysis
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Over the last two decades several countries experienced currency crises. These were characterized both by a huge disruption of economic activity and an extreme speed of diffusion within countries. The financial turmoil happened in a period of very high degree of international financial integration. As a result financial liberalization was associated with greater incidence of crises and this brought an intense debate in both academic and policy circles about the consequences of free capital movements. In this paper we aim to check the existence and the strength of credit channel and balance sheet effects in countries characterized by an intermediate level of financial development. A huge literature exists about the topic concerning the role that credit market and financial development play on the real activity. The paper empirically examines the dynamic relationship between financial development and economic growth. A time-series approach using the VAR Model has been used to provide an assessment of empirical evidence on the effects of financial development on macroeconomic volatility.
Financial globalization, economic growth, and macroeconomic volatility
This paper evaluates the effects of financial globalization on growth and macroeconomic volatility, from 1984 to 2003, for a sample of 43 countries. Particular attention is given to those effects on the member countries of the Latin American Reserve Fund (FLAR): Bolivia, Colombia, Costa Rica, Ecuador, Peru, and Venezuela. The findings show that financial globalization spurs growth, when the countries' income level is controlled; it does not increase macroeconomic volatility, as it is commonly stated, but does not reduce it either. Belonging to FLAR does not seem to make a difference in terms of growth and macroeconomic volatility; h owever, the findings of a strong negative effect on the volatility of consumption might be related to the fact that those countries have an insurer (FLAR) that has helped them to smooth consumption during periods of adverse external shocks.