Financial development and the transmission of monetary shocks

Robert Lensink and Bert Scholtens

No 04E05, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: We investigate whether the financial system dampens or exacerbates monetary shocks of inflation uncertainty to the economy. Our GMM-estimates for 88 countries over a period of 25 years show that inflation uncertainty has a positive and significant impact on the volatility of economic growth. More importantly, we find that financial development dampens the negative effects of inflation uncertainty on the volatility of economic growth. This confirms the importance of a well-developed financial sector.

Date: 2004
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