Further Evidence on the Link Between Finance and Cyclical Fluctuations

Ali Darrat () and Mahmoud Haj
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Ali Darrat: Department of Economics & Finance, CAB, Louisiana Tech University

No 139, Working Papers from Economic Research Forum

Abstract: This paper explores the possibility that financial market development mitigates cyclical fluctuations in several developing countries. The paper uses the GARCH approach to account for the time-varying behavior of macroeconomic volatility, and distinguishes between overall and sectoral macroeconomic volatility. Results from co-integration and error-correction models suggest that financial market development (alternatively measured) does exert a robust long-term dampening effect on macroeconomic volatility. In contrast, short-term effects of financial development on cyclical fluctuations are generally tenuous, or non-existent. These findings imply that financial reforms can contribute to macroeconomic stability, but only if these reforms persist over a prolonged period of time. The results also suggest that financial reforms impact economic sectors differently across the countries examined.

Pages: 22 pages
Date: 2001-20-12, Revised 2001
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Published by The Economic Research Forum (ERF)

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