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

Kangni Kpodar, Maëlan Le Goff () and Raju Singh

Working papers from Banque de France

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: Banks; stock markets; terms of trade shocks; growth volatilit. (search for similar items in EconPapers)
JEL-codes: F40 G20 O10 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019
New Economics Papers: this item is included in nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:719

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