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How does financial development alter the impact of uncertainty?

Kıvanç Karaman and Seçil Yıldırım-Karaman

Journal of Banking & Finance, 2019, vol. 102, issue C, 33-42

Abstract: How does the impact of uncertainty on output vary with financial development levels? We investigate this question empirically, using a quarterly panel data set of 50 countries between 1971 and 2009 and an Instrumental Variables model. The results support the conjecture that financial development mitigates the negative impact of uncertainty on output. At the lower end of the distribution of the financial development levels, one standard deviation increase in uncertainty decreases output by more than two standard deviations. At the higher end of financial development, the impact on output is statistically insignificant. These results suggest that strengthening the financial system and increasing liquidity and credit availability improce the robustness of growth performance during periods of uncertainty.

Keywords: Uncertainty; Economic recessions; Financial development (search for similar items in EconPapers)
JEL-codes: E32 E44 G10 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jbankfin.2019.03.008

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Handle: RePEc:eee:jbfina:v:102:y:2019:i:c:p:33-42