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Revisiting the Link Between Finance and Macroeconomic Volatility

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  • Era Dabla-Norris
  • Narapong Srivisal
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    Abstract

    This paper examines the impact of financial depth on macroeconomic volatility using a dynamic panel analysis for 110 advanced and developing countries. We find that financial depth plays a significant role in dampening the volatility of output, consumption, and investment growth, but only up to a certain point. At very high levels, such as those observed in many advanced economies, financial depth amplifies consumption and investment volatility. We also find strong evidence that deeper financial systems serve as shock absorbers, mitigating the negative effects of real external shocks on macroeconomic volatility. This smoothing effect is particularly pronounced for consumption volatility in environments of high exposure - when trade and financial openness are high - suggesting significant gains from further financial deepening in developing countries.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/29.

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    Length: 36
    Date of creation: 30 Jan 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/29

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    Related research

    Keywords: Financial systems; Developed countries; Developing countries; Cross country analysis; Economic models; private consumption; external shocks; trade openness; growth rate; terms of trade; real gdp; output volatility; trade growth; open economies; trade shocks; gdp growth; export price; gdp per capita; annual percentage growth; commodity prices; business cycle; terms-of-trade shocks; terms of trade shocks; aggregate volatility; terms-of-trade volatility; growth rate of output; partner country; output growth; export ratio; trading partner; growth rates; total consumption; export prices; business cycles; source of business cycle; commodity exporters; economic growth; net exports; business cycle volatility; risk diversification;

    References

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    13. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
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    15. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
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    Cited by:
    1. Hartwell , Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies: a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland, Institute for Economies in Transition.

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