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Stress-ridden finance and growth losses: does financial development break the link?

Author

Listed:
  • Matias Ossandon Busch

    (CEMLA)

  • Manuel Ramos-Francia

    (CEMLA)

  • Ricardo Montañez

    (CEMLA)

  • Serafín Martínez-Jaramillo

    (Banco de Mexico)

  • José Manuel Sánchez-Martínez

    (McGill University)

  • Anahí Rodríguez-Martínez

    (University College London)

Abstract

Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterizing the probability density of expected GDP growth conditional on financial stress indicators in a panel of 28 countries. Our robust results unveil a non-linear nexus between financial stress and expected GDP growth, depending on countries' degree of financial development. While both domestic and global financial factors affect expected growth, the effect of global stress factors is moderated by financial development. This result highlights a previously unexplored channel trough which financial development can break the link between financial (in)stability and GDP growth.

Suggested Citation

  • Matias Ossandon Busch & Manuel Ramos-Francia & Ricardo Montañez & Serafín Martínez-Jaramillo & José Manuel Sánchez-Martínez & Anahí Rodríguez-Martínez, 2023. "Stress-ridden finance and growth losses: does financial development break the link?," CEMLA Working Paper Series 01/2023, CEMLA.
    • Handle: RePEc:cml:wpseri:01
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    More about this item

    Keywords

    economic growth; financial stability; financial development; capital flows; growth at risk.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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