Financial Intermediary Development and Growth Volatility : Do Intermediaries Dampen or Magnify Shocks?
The authors extend the recent literature on the link between financial development and economic volatility by focusing on the channels through which the development of financial intermediaries affects economic volatility. Their theoretical model pr...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/11/1631799/financial-intermediary-development-growth-volatility-intermediaries-dampen-or-magnify-shocks http://hdl.handle.net/10986/19440 |
| Summary: | The authors extend the recent literature
on the link between financial development and economic
volatility by focusing on the channels through which the
development of financial intermediaries affects economic
volatility. Their theoretical model predicts that
well-developed financial intermediaries dampen the effect of
real sector shocks on the volatility of growth while
magnifying the effect of monetary shocks-suggesting that,
overall, financial intermediaries have no unambiguous effect
on growth volatility. The authors test these predictions in
a panel data set covering 63 countries over the period
1960-97, using the volatility of terms of trade to proxy for
real volatility, and the volatility of inflation to proxy
for monetary volatility. They find no robust relationship
between the development of financial intermediaries and
growth volatility, weak evidence that financial
intermediaries dampen the effect of terms of trade
volatility, and evidence that financial intermediaries
magnify the impact of inflation volatility in low- and
middle-income countries. |
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