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Economic Growth, Volatility and Their Interaction: What’s the role of finance?

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  • Sergio Henrique Rodrigues da Silva
  • Benjamin Miranda Tabak
  • Daniel Oliveira Cajueiro
  • Dimas Mateus Fazio

Abstract

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.

Suggested Citation

  • Sergio Henrique Rodrigues da Silva & Benjamin Miranda Tabak & Daniel Oliveira Cajueiro & Dimas Mateus Fazio, 2018. "Economic Growth, Volatility and Their Interaction: What’s the role of finance?," Working Papers Series 474, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:474
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    More about this item

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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