How does terms of trade volatility affect macroeconomic volatility? The roles of financial development and institutions

Désiré Avom, Brice Kamguia, Joseph Pasky Ngameni and Henri Njangang

International Economics, 2021, vol. 168, issue C, 98-114

Abstract: This paper examines the effect of terms-of-trade volatility on growth volatility. It also investigates whether financial development and institutional quality mitigate the negative effect of terms-of-trade volatility on growth volatility. The model is empirically tested for 45 African countries over the period 1997–2017. The empirical strategy is based on the generalized method of moments, and the following results are established. Strong evidence is provided to support that terms of trade volatility increases growth volatility in African countries. The results further indicate that institutional quality mitigates the negative effect of terms-of-trade volatility. When financial development is considered, we provide evidence that financial development is a shock absorber, with financial institutions having a stronger effect than financial markets. These results are robust to the use of alternative measures of growth volatility, terms of trade volatility, and different specifications.

Keywords: Terms of trade volatility; Growth volatility; Financial institutions; Financial markets; Institutions (search for similar items in EconPapers)
JEL-codes: E02 E32 E44 G20 O43 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:168:y:2021:i:c:p:98-114

DOI: 10.1016/j.inteco.2021.08.004

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