The Effects of Volatility on Growth and Financial Development through Capital Market Imperfections
This paper provides a model to account for the empirical evidence that volatility reduces growth. In the model, greater volatility increases the cost associated with capital market imperfections and induces the financial intermediaries to charge higher interest rates. The model is based on one of overlapping generations with two types of technologies. The more productive technology requires fixed investment in the first period. Individual with income less than the amount of fixed investment may borrow in financial markets to obtain more productive technology. Increase in volatility raises the cost of borrowing and makes it less attractive to invest in more productive technology for individuals below certain income in the first period. Hence, volatility reduces growth by deterring people from taking advantage of more productive technology. This model also explains the empirical findings of Ramey and Ramey (1995) that investment is not the channel between volatility and growth by suggesting that totals factor productivity rather than the total factor accumulation is the key for growth.
(This abstract was borrowed from another version of this item.)
|Date of creation:||Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Natuk Birkan Hall, Bebek, 34342 İstanbul|
Phone: +90 (212) 359-6505
Fax: +90 (212) 287-2453
Web page: http://www.econ.boun.edu.tr/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert S. Pindyck & Andrés Solimano, 1993.
"Economic Instability and Aggregate Investment,"
in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318
National Bureau of Economic Research, Inc.
- Pindyck, Robert S. & Solimano, Andrés., 1993. "Economic instability and aggregate investment," Working papers 3552-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pindyck, Robert S. & Solimano, Andres, 1993. "Economic instability and aggregate investment," Policy Research Working Paper Series 1148, The World Bank.
- Robert S. Pindyck & Andres Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Working Papers 4380, National Bureau of Economic Research, Inc.
- Martin, Philippe & Rogers, Carol Ann, 1995.
"Long-Term Growth and Short-Term Economic Instability,"
CEPR Discussion Papers
1281, C.E.P.R. Discussion Papers.
- Martin, Philippe & Ann Rogers, Carol, 2000. "Long-term growth and short-term economic instability," European Economic Review, Elsevier, vol. 44(2), pages 359-381, February.
- Robert M. Townsend, 1979.
"Optimal contracts and competitive markets with costly state verification,"
45, Federal Reserve Bank of Minneapolis.
- Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
- Joshua Aizenman & Nancy Marion, 1991.
"Policy Uncertainty, Persistence and Growth,"
NBER Working Papers
3848, National Bureau of Economic Research, Inc.
- Levine, Ross & Renelt, David, 1991.
"A sensitivity analysis of cross-country growth regressions,"
Policy Research Working Paper Series
609, The World Bank.
- Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
- Aizenman, Joshua & Marion, Nancy, 1999. "Volatility and Investment: Interpreting Evidence from Developing Countries," Economica, London School of Economics and Political Science, vol. 66(262), pages 157-79, May.
- Romain Ranciere & Aaron Tornell & Frank Westermann, 2004.
"Crises and Growth: A Re-evaluation,"
UCLA Economics Working Papers
832, UCLA Department of Economics.
- Romain Ranciere & Aaron Tornell & Frank Westermann, 2004. "Crises and Growth: A Re-Evaluation," CESifo Working Paper Series 1160, CESifo Group Munich.
- Romaine Ranciere & Aaron Tornell & Frank Westermann, 2003. "Crises and Growth: A Re-Evaluation," NBER Working Papers 10073, National Bureau of Economic Research, Inc.
- Romain Rancière & Aaron Tornell & Frank Westermann, 2002. "Crises and growth: A re-evaluation," Economics Working Papers 852, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2003.
- Fran Westermann & Romain Ranciere & Aaron Tornell, 2004. "Crises and Growth: A Re-evaluation," 2004 Meeting Papers 130, Society for Economic Dynamics.
- Aizenman, Joshua & Powell, Andrew, 2003.
"Volatility and financial intermediation,"
Journal of International Money and Finance,
Elsevier, vol. 22(5), pages 657-679, October.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Garey Ramey & Valerie A. Ramey, 1994.
"Cross-Country Evidence on the Link Between Volatility and Growth,"
NBER Working Papers
4959, National Bureau of Economic Research, Inc.
- Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
- Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
- Betancourt, Roger R, 1996. "Growth Capabilities and Development: Implications for Transition Processes in Cuba," Economic Development and Cultural Change, University of Chicago Press, vol. 44(2), pages 315-31, January.
- Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
- Pritchett, Lant, 2000. "Understanding Patterns of Economic Growth: Searching for Hills among Plateaus, Mountains, and Plains," World Bank Economic Review, World Bank Group, vol. 14(2), pages 221-50, May.
- Erik Canton, 2002. "Business cycles in a two-sector model of endogenous growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(3), pages 477-492.
- Ahmed Mushfiq Mobarak, 2005. "Democracy, Volatility, and Economic Development," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 348-361, May.
When requesting a correction, please mention this item's handle: RePEc:bou:wpaper:2006/12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lutfu Gozgucu)
If references are entirely missing, you can add them using this form.