Financial globalization, economic growth, and macroeconomic volatility (original) (raw)
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Financial Globalization, Growth and Volatility in Developing Countries
2004
This paper provides a comprehensive assessment of empirical evidence about the impact of financial globalization on growth and volatility in developing countries. The results suggest that it is difficult to establish a robust causal relationship between financial integration and economic growth.
2019
We examine the effects of financial globalization and exchange rate volatility on growth in emerging and developing countries. We generate several measures of exchange rate volatility, as well as their interaction terms with indicators of disaggregated financial globalization. Using the two-step GMM system method on dynamic panel data, we find that exchange rate volatility has a negative impact on long-term growth. On the contrary, financial globalization, and particularly investment-globalization, promotes growth not only directly, but also indirectly, by reducing the negative impact of exchange rate volatility. However, the results show that indebtedness-globalization does not produce these benefits. In this way, the results inform the government's decision on the liberalization of the domestic financial market. JEL: E44, F21, F36, O42, G15, G18
2019
This paper analyses the effects of financial globalization on growth in developing countries, focusing on its interaction with exchange rate volatility. Based on dynamic panel data models and the two-step system Generalized Method of Moments (system GMM) estimator, it replicates the method of Gaies et al. (2019a; 2019b) and extends it by exploring a new spillover effect of financial globalization in terms of exchange rate volatility measured by six different indicators. The findings show the positive influence of investment-globalization on growth through the traditional channel of capital accumulation and by reducing the negative impact of exchange rate volatility. These impacts are not ensured by indebtedness-globalization, thereby shedding light on the government's decision in developing countries on foreign capital control policy. These results are robust to changes in the estimator and variables used.
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.
Financial Development, Shocks, and Growth Volatility
Macroeconomic Dynamics, 2014
This paper uses spectral theory to develop the following two testable hypotheses in a unified framework for the predictions of business-cycle and endogenous growth models: (i) financial development affects only business-cycle volatility; and (ii) shocks affect both business-cycle volatility and long-run volatility of GDP growth. In other words, volatility caused by shocks is more persistent than that caused by financial underdevelopment. We decompose the business-cycle and long-run volatility by the spectral method and then test the hypotheses at the cross-country level. Empirical evidence provides support for both hypotheses. Higher private credit, a bank-based measure of financial development, dampens business-cycle volatility but not long-run volatility. Volatility of shocks, as measured by the volatility of changes in the terms of trade, magnifies both business-cycle and long-run volatility. The results are robust to accounting for endogeneity, a market-based measure of financia...
FINANCIAL DEVELOPMENT AND GROWTH VOLATILITY: TIME SERIES EVIDENCE FOR MEXICO AND THE UNITED STATES
This paper explores the influences of financial deepening on growth and its volatility. Following a review of the theoretical literature that has attempted to explain these relationships, the paper presents time series evidence ─using GARCH models─ for the cases of Mexico and the US. The results suggest that, in the case of the US, financial deepening has been related to the rate of real output growth but that finance has not shown a significant relationship with output volatility. In the Mexican case, financial deepening has reduced the volatility of growth which, in turn, has induced higher output growth rates. Further, higher US growth rates have resulted in higher and less volatile growth rates in the Mexican economy.
Growth volatility and financial liberalization
Journal of International Money and Finance, 2006
We examine the effects of both equity market liberalization and capital account openness on real consumption growth variability. We show that financial liberalization is mostly associated with lower consumption growth volatility. Our results are robust, surviving controls for business-cycle effects, economic and financial development, the quality of institutions, and other variables. Countries that have more open capital accounts experience a greater reduction in consumption growth volatility after equity market openings. We also find that financial liberalizations are associated with declines in the ratio of consumption growth volatility to GDP growth volatility, suggesting improved risk sharing. Our results are weaker for liberalizing emerging markets but we never observe a significant increase in real volatility. Moreover, we demonstrate significant differences in the volatility response depending on the size of the banking and government sectors and certain institutional factors.
Iranian Economic Review, 2012
his paper explores effects of financial liberalization on macroeconomic volatilities (such as economic growth, real exchange rate and exchange rate pass through) in developing countries. It also examines the interaction between such volatilities in a theoretical and empirical framework of a macro-model. To this end, we have used data of 43 developing economies over the period of 1996-2005, and then estimated a panel-simultaneous equation system to find out the effects of financial liberalization on macroeconomic volatilities. Empirical results show a significant inverse effect of financial liberalization on economic growth volatility. But effects of the financial liberalization on the volatilities of real exchange rate and exchange rate pass-through have been positive and significant as expected. Furthermore, the results show that such volatilities have a significant interacted relationship.
SEMINAR on Management of Volatility, Financial Liberalization and Growth in Emerging Economies
2000
In 1995, when contagion from the tequila crisis was spreading in Latin America, both Chile and Colombia were exempt from contagion and presented high rates of economic growth. Many analysts attribute this positive performance to the fact that both had undertaken prudential measures to avoid excessive exposure to short term capital flows and pressures towards excessive real exchange rate appreciation: Both countries were using a reserve requirement on short term foreign indebtedness, crawlingbands, and other instruments for reducing domestic vulnerability to capital flows. The parallelism between Chile and Colombia continued after the Asian crisis. In this period, despite the fact that short-term debt represented only a small share of foreign debt in both countries, vulnerability to the international financial crisis was high. In both, real interest rates rose sharply in 1998 and GDP growth was negative in 1999. The similarities between Chile and Colombia, however, do not go much farther. During the 1990s, GDP growth rates were very high in Chile while in Colombia they were below historical standards. Chile had fiscal surpluses and high private savings, while in Colombia there was a rapidly increasing fiscal deficit and falling domestic savings. This paper presents a comparative analysis of the macroeconomic policies of Chile and Colombia during the 1990s, in particular the exchange rate regimes, the capital account regulations, and the gestation and management of financial crises.