Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries

Kangni Kpodar, Maëlan Le Goff () and Raju Singh

No 2019/068, IMF Working Papers from International Monetary Fund

Abstract: This paper contributes to the literature by looking at the possible relevance of the structure of the financial system—whether financial intermediation is performed through banks or markets—for macroeconomic volatility, against the backdrop of increased policy attention on strengthening growth resilience. With low-income countries (LICs) being the most vulnerable to large and frequent terms of trade shocks, the paper focuses on a sample of 38 LICs over the period 1978-2012 and finds that banking sector development acts as a shock-absorber in poor countries, dampening the transmission of terms of trade shocks to growth volatility. Expanding the sample to 121 developing countries confirms this result, although this role of shock-absorber fades away as economies grow richer. Stock market development, by contrast, appears neither to be a shock-absorber nor a shock-amplifier for most economies. These findings are consistent across a range of econometric estimators, including fixed effect, system GMM and local projection estimates.

Keywords: WP; terms of trade shock; terms of trade volatility; Banks; stock markets; terms of trade shocks; growth volatility; terms of trade fluctuation; terms of trade stock; standard deviation; shocks to growth volatility; Terms of trade; Commercial banks; Financial sector development; Credit; Global (search for similar items in EconPapers)
Pages: 35
Date: 2019-03-25
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries (2018)
Working Paper: Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries (2018)
Working Paper: Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries (2018)
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