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Financial development, sectoral reallocation, and volatility: International evidence

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  • Manganelli, Simone
  • Popov, Alexander

Abstract

This paper studies how financial development affects the volatility of GDP growth through the channel of sectoral reallocation. For 28 OECD countries over the period 1970–2007, we construct a benchmark industrial portfolio that minimizes the economy's long-term volatility for a given level of long-term labor productivity growth. We find that financial development substantially increases the speed with which the observed industrial composition of output converges toward the benchmark. To overcome endogeneity concerns, we exploit sectoral sensitivities to financial deepening and exogenous liberalization events.

Suggested Citation

  • Manganelli, Simone & Popov, Alexander, 2015. "Financial development, sectoral reallocation, and volatility: International evidence," Journal of International Economics, Elsevier, vol. 96(2), pages 323-337.
  • Handle: RePEc:eee:inecon:v:96:y:2015:i:2:p:323-337
    DOI: 10.1016/j.jinteco.2015.03.008
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    Cited by:

    1. Loayza,Norman V. & Ouazad,Amine & Ranciere,Romain, 2017. "Financial development, growth, and crisis: is there a trade-off ?," Policy Research Working Paper Series 8237, The World Bank.
    2. repec:eee:finana:v:56:y:2018:i:c:p:193-207 is not listed on IDEAS
    3. Becker, Christian & Ossandon Busch, Matias & Tonzer, Lena, 2017. "Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil," IWH Discussion Papers 21/2017, Halle Institute for Economic Research (IWH).
    4. Pengfei Wang & Yi Wen & Zhiwei Xu, 2018. "Financial Development and Long-Run Volatility Trends"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 221-251, April.

    More about this item

    Keywords

    Financial development; Volatility; Growth; Diversification; Mean-variance efficiency;

    JEL classification:

    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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