Does Financial Development have an impact on Economic Growth and Economic Volatility ? (original) (raw)
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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...
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...
Economics Letters, 2018
This paper examines the effect of financial development on economic growth volatility in a sample of 50 developing countries from 1960 to 2016. Since no conclusive results have been provided by previous studies on such association, we employ a semi-parametric panel fixedeffects regression model as introduced by Baltagi and Li (2002). The semi-parametric model does not impose any functional restriction on the relationship between financial development and economic volatility and helps to capture the existence of non-linearities in the data. We find that the financial development-volatility relation is non linear with multiple turning points. Our findings make new evidences on the financial development-economic volatility nexus.
Financial development and growth: An empirical analysis
Economic Modelling, 2009
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.
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
Financial Development And Economic Growth Revisited: Time Series Evidence
International journal trade, economics and finance, 2018
This paper examines the causality between financial development and economic growth for over 80 countries around the world with different levels of per capita income during 1970-2014. I employed the vector autoregression (VAR) approach to conduct Granger causality tests to determine the direction of causality relationship between financial development and economic growth. The results provide evidence of two of the three main views on the link between financial development and economic growth: the supply leading theory (financial development causes economic growth or positive causality); and the demand following response (economic growth causes financial development or reverse causality). The results of this study suggest that: 1) there is a strong evidence that causality exists between the financial development and economic growth, 2) direction of causality is bidirectional in countries with higher GDP per capita; 3) an evidence of positive causality running from finance to real sector growth for middle-and low-income countries. The findings are consistent with earlier literature in that the direction of causality may be country specific. However, it does not fully support King and Levine conclusion that finance is a leading sector to long run economic growth. The findings of this research give some further guidance as to whether a well-developed financial sector is a necessary condition for a higher growth rates for developing countries and provide an important policy implication both for OECD countries as well as for countries that have financial sectors that are comparatively underdeveloped.
Financial Development and Economic Growth: A Dynamic Panel Data Analysis
international journal of research in computer application & management, 2014
This study investigates the relationship between financial development and economic growth in the context of five South Asian countries for the period 1985-2014. Pedroni, Johansen co-integration, and panel based Granger causality tests are employed to examine the long and short run relationship dynamics between economic growth and other instrumental variables estimated in this paper. A vector autoregressive model (VAR) is a constructive method of analyzing the impact of a given variable on itself and all other variables by using variance decompositions (VDCs) and impulse response functions (IRFs). To check the robustness of this study, fully modified least square (FMOLS) has been conducted. The results of Pedroni and Johansen co-integration tests confirm that the indicators of financial development have a co-integration relationship with economic growth in the long run. Granger causality test shows that bidirectional causality between economic growth to M2 and also real interest rate and domestic credit to private sector in the short run. Moreover, unidirectional causality exists among the total value of stock traded variable to economic growth, M2 to domestic credit to private sector and M2 to real interest rate in the short run. This paper also documents shocks in stock traded total value has strongly positive response to economic growth. Shocks to domestic credit to private sector, trade openness, M2 have positive response with economic growth but not very strong. The shocks response function of real interest rate to economic growth is negative and quickly returns to the equilibrium. The results of variance decomposition confirm that shocks in the variables of M2 and stock traded total value shock have more impact on economic growth in the long run. FMOLS is employed to check the robustness and shows that financial development and economic growth are holding same relationship except the real interest rate. Policy makers should take immediate steps to minimize the interest rate spread in the south Asian countries. An optimum real interest rate spread will spur the growth process in the south Asian region. The policy makers also should think for transformation of the financial system through upgrading and strictly imposing the financial rules and regulations. The financial institutions must be monitored closely and the policy makers should pay more attention on that issue.