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.
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
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.:
- Pindyck, Robert S. & Solimano, Andrés., 1993.
"Economic instability and aggregate investment,"
3552-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert S. Pindyck & Andres Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Working Papers 4380, National Bureau of Economic Research, Inc.
- Pindyck, Robert S. & Solimano, Andres, 1993. "Economic instability and aggregate investment," Policy Research Working Paper Series 1148, The World Bank.
- 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.
- 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.
- Fran Westermann & Romain Ranciere & Aaron Tornell, 2004. "Crises and Growth: A Re-evaluation," 2004 Meeting Papers 130, Society for Economic Dynamics.
- 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.
- Aizenman, Joshua & Marion, Nancy P, 1993.
"Policy Uncertainty, Persistence and Growth,"
Review of International Economics,
Wiley Blackwell, vol. 1(2), pages 145-63, June.
- 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.
- Robert 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Joshua Aizenman & Andrew Powell, 1997.
"Volatility and Financial Intermediation,"
NBER Working Papers
6320, National Bureau of Economic Research, Inc.
- 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.
- Ahmed Mushfiq Mobarak, 2005. "Democracy, Volatility, and Economic Development," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 348-361, May.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:5486. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.