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Economic growth volatility: Is financialization a culprit?

Author

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  • Wasim Ullah

    (Universiti Malaysia Terengganu, Kuala Terengganu, Malaysia
    National Bank of Pakistan, Islamabad, Pakistan)

Abstract

Financial development plays a crucial role in shaping economic growth, yet it can introduce volatility. This study examines the relationship between financial development and economic growth volatility. Using panel data from 60 countries (30 developed and 30 developing) for 1981–2022, we employ panel-corrected standard errors and generalized method of moments to ensure robustness. Financial development is analyzed through financial institutions and financial markets across three dimensions: depth, access, and efficiency. Conceptually, the paper finds that the supply-leading hypothesis does not account for the economic growth volatility associated with excessive financialization. The results indicate that, at higher levels, financial development has a volatility-enhancing impact in developed countries, while in developing countries it has a volatility-reducing effect. Policymakers in developed countries should ensure that credit expansion is aligned with real-sector development. Regulators should monitor adverse effects of financial depth and ensure funds are directed toward real-sector growth, while improving access and efficiency. In a too‑much-finance scenario, economies need moderators — such as strong regulatory quality and well-defined rights for creditors and borrowers — to mitigate volatility-enhancing effects.

Suggested Citation

  • Wasim Ullah, 2025. "Economic growth volatility: Is financialization a culprit?," Russian Journal of Economics, ARPHA Platform, vol. 11(4), pages 381-402, December.
    • Handle: RePEc:arh:jrujec:v:11:y:2025:i:4:p:381-402
    DOI: 10.32609/j.ruje.11.154180
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    References listed on IDEAS

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    1. Cecchetti, Stephen & Kharroubi, Enisse, 2015. "Why does financial sector growth crowd out real economic growth?," CEPR Discussion Papers 10642, Centre for Economic Policy Research.
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    More about this item

    Keywords

    ;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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