Financial development and declining growth volatility: Explanations and an empirical study with the latest FD index

Oğuzhan Yılmaz ()

Structural Change and Economic Dynamics, 2024, vol. 70, issue C, 457-470

Abstract: Growth is liked, but volatility is not. Volatility implies uncertainty, as up and down are often large unpredictable fluctuations. In fact, according to the financial literature, people pay a price to reduce it. Some studies found a trend that macroeconomic volatility has been changing and proposed some structural changes that are responsible for its decline. Many studies have found that financial development helps growth. And relatively few studies have shown that financial development also explains structurally varying macroeconomic volatility. In this panel study, we investigated the relationship between financial development and growth volatility using the Financial Development Index with recent data from eighty-six countries. We also looked at its relationship with consumption and investment fluctuations using its sub-indices. The index is the result of many dimensions of financial development such as access and efficiency, not just the size of credit. We find that financial development reduces growth variability across various horizons, with some signs of heterogeneity and nonlinearity. Institutional development (polity index) and volatility in global economic growth are other important consistent variables.

Keywords: Growth volatility; Financial development; Structural change; Financial development index (search for similar items in EconPapers)
JEL-codes: E32 E44 O11 O16 O47 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:70:y:2024:i:c:p:457-470

DOI: 10.1016/j.strueco.2024.05.013

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