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Revisiting the Link Between Finance and Macroeconomic Volatility


  • Era Dabla-Norris
  • Narapong Srivisal


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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  • Era Dabla-Norris & Narapong Srivisal, 2013. "Revisiting the Link Between Finance and Macroeconomic Volatility," IMF Working Papers 13/29, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/29

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    References listed on IDEAS

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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.
    2. Chowdhury, Abdur, 2015. "Terms of trade shocks and private savings in the developing countries," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1122-1134.
    3. Amjad Ali & Farooq Ahmed & Fazal- Ur- Rahman, 2016. "Impact of Government Borrowing on Financial Development (A case study of Pakistan)," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(3), pages 135-143, September.
    4. Emiel van Bezooijen & Jacob Bikker, 2017. "Financial structure and macroeconomic volatility: a panel data analysis," DNB Working Papers 568, Netherlands Central Bank, Research Department.
    5. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.
    6. Andersen, Asger Lau & Duus, Charlotte & Jensen, Thais Lærkholm, 2016. "Household debt and spending during the financial crisis: Evidence from Danish micro data," European Economic Review, Elsevier, vol. 89(C), pages 96-115.
    7. repec:eee:phsmap:v:484:y:2017:i:c:p:66-81 is not listed on IDEAS
    8. Ratna Sahay & Martin Cihák & Papa N’Diaye & Adolfo Barajas & Ran Bi & Diana Ayala & Yuan Gao & Annette Kyobe & Lam Nguyen & Christian Saborowski & Katsiaryna Svirydzenka & Seyed Reza Yousefi, 2015. "Repensar la profundización financiera: estabilidad y crecimiento en los mercados emergentes," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 17(33), pages 73-107, July-Dece.
    9. repec:eee:eecrev:v:102:y:2018:i:c:p:211-239 is not listed on IDEAS


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