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

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  • Martínez-Jaramillo, Serafín
  • Montañez-Enríquez, Ricardo
  • Ossandon Busch, Matias
  • Ramos-Francia, Manuel
  • Rodríguez-Martínez, Anahí
  • Sánchez-Martínez, Manuel

Abstract

Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterising the probability density of expected GDP growth conditional on financial stability indicators in a panel of 28 countries. Our robust results unveil a non-linear nexus between financial stability 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 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

  • Martínez-Jaramillo, Serafín & Montañez-Enríquez, Ricardo & Ossandon Busch, Matias & Ramos-Francia, Manuel & Rodríguez-Martínez, Anahí & Sánchez-Martínez, Manuel, 2022. "Stress-ridden finance and growth losses: Does financial development break the link?," IWH Discussion Papers 3/2022, Halle Institute for Economic Research (IWH).
    • Handle: RePEc:zbw:iwhdps:32022
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    More about this item

    Keywords

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

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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