Economic Growth, Volatility and Their Interaction: What’s the role of finance?

Sergio Silva, Benjamin Tabak, Daniel Cajueiro and Dimas Fazio

No 474, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper examines the relation between financial depth and the interaction of economic growth and its volatility. We use a sample of 52 countries for the period 1980–2011, and our main finding is that, at moderate levels of financial depth, further deepening increases the ratio of average economic growth to volatility; however, as financial depth gets higher, this relation reverts, and the rise in volatility overcomes that of economic growth. This result is obtained both in the medium and long run; however, the peak of the relation seems to be lower in the medium run (domestic credit-to-GDP ratio around 40% to 55%) than in the long run (around 75% to 99%). This suggests that increasing the domestic credit-to-GDP ratio may intensify relative volatility in the medium term, but still may raise relative long-term growth before the long-run threshold is achieved.

Date: 2018-03
New Economics Papers: this item is included in nep-fdg and nep-mac
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Journal Article: Economic growth, volatility and their interaction: What’s the role of finance? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:474

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