Revisiting the Link Between Finance and Macroeconomic Volatility

Era Dabla-Norris and Narapong Srivisal

No 2013/029, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the impact of financial depth on macroeconomic volatility using a dynamic panel analysis for 110 advanced and developing countries. We find that financial depth plays a significant role in dampening the volatility of output, consumption, and investment growth, but only up to a certain point. At very high levels, such as those observed in many advanced economies, financial depth amplifies consumption and investment volatility. We also find strong evidence that deeper financial systems serve as shock absorbers, mitigating the negative effects of real external shocks on macroeconomic volatility. This smoothing effect is particularly pronounced for consumption volatility in environments of high exposure - when trade and financial openness are high - suggesting significant gains from further financial deepening in developing countries.

Keywords: WP; yes; external shock; consumption volatility; GDP; Financial Depth; Macroeconomic Volatility; volatility regression; investment volatility; consumption decision; per-capita GDP; standard deviation; Consumption; Private consumption; Credit; Terms of trade; Financial sector development; Global (search for similar items in EconPapers)
Pages: 36
Date: 2013-01-30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40284 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2013/029

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().