Mallick, Debdulal (2009): Financial Development, Shocks, and Growth Volatility.
Download (594Kb) | Preview
This paper argues that studying the effect of financial development and shocks on aggregate growth volatility will not be informative because they affect growth volatility through its different components. Volatility declines either a consequence of a change in the nature of shocks or a change in how the economy reacts to shocks. If two economies differ only in terms of volatility of shocks experienced, the GDP growth spectrum of one economy will lie proportionately below that of another at all frequency ranges so that both business cycle and long-run variances will be lower. Conversely, if change in volatility is due to propagation mechanism such as financial development, a country having developed financial markets will have disproportionately lower variance at the business cycle than at other frequencies relative to that of a country having less developed financial markets. Therefore, the variance at only the business cycle frequency range will be influenced by financial development. The novelty of this paper is that different components of growth volatility are extracted using spectral method.
Empirical evidence provides qualified support for both hypotheses. Higher private credit, which is used as proxy of financial development, dampens business cycle volatility but not the long-run volatility. Shocks, as measured by changes in the terms of trade, affect both business cycle and long-run volatility negatively. These results are robust to alternative market-based measure of financial development, and corrections for reverse causality. These results have important implications for growth theory as they shed lights on the factors causing permanent and transitory deviations from the steady state.
|Item Type:||MPRA Paper|
|Original Title:||Financial Development, Shocks, and Growth Volatility|
|English Title:||Financial Development, Shocks, and Growth Volatility|
|Keywords:||Financial development, growth volatility, business cycle, spectral analysis|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O50 - General
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C21 - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions
|Depositing User:||Debdulal Mallick|
|Date Deposited:||12. Oct 2009 13:12|
|Last Modified:||17. Feb 2013 16:29|
Acemoglu, Daron, and Fabrizio Zilibotti (1997), “Was Prometheus Unbound by Chance? Risk, Diversification, and Growth,” Journal of Political Economy, 105 (4), 709-751.
Acemoglu, Daron, Simon Johnson, James Robinson, and Yunyong Thaicharoen (2003), “Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth,” Journal of Monetary Economics, 50 (1, January) 49–123.
Aghion, Philippe, Abhijit Banerjee, Thomas Piketty (1999), “Dualism and Macroeconomic Volatility” Quarterly Journal of Economics, 114 (4, November) 1359–1397.
Aghion, Philippe, and Abhijit Banerjee (2005), “Volatility and Growth,” Oxford University Press, New York.
Aghion, Philippe, George-Marios Angeletos, Abhijit V. Banerjee and Kalina Manova, (2007), “Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment” MIT mimeo.
Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee, (2004), “Financial Development and the Instability of Open Economies” Journal of Monetary Economics, 51 (6, September) 1077–1106.
Ahmed, Shagil, Andrew Levin, and Beth Ann Wilson (2004), “Recent U.S. Macroeconomic Stability: Good Policies, Good Practices and Good Luck,” Review of Economics and Statistics, 86 (3), 824-32.
Aizenman, Joshua, and Andrew Powell (2003), “Volatility and Financial Intermediation,” Journal of International Money and Finance, 22 (5), 657-679.
Bacchetta, Philippe, and Ramon Caminal (2000), “Do Capital Market Imperfections Exacerbate Output Fluctuations?,” European Economic Review, 44 (3), 449-468.
Baxter, Marianne, and Robert G. King (1999), “Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series,” Review of Economics and Statistics, 81(4, November), 575–593.
Beck, Thorsten, and Ross Levine (2002), “Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?,” Journal of Financial Economics, 64 (2), 147-180.
Beck, Thorsten, Ashli Demirgüç-Kunt, and Ross Levine (2002), “A New Database on the Structure and Development of the Financial Sector,” World Bank Economic Review, 14 (3), 597-605. (Updated November, 2008).
Bekaert, Geert., Campbell R. Harvey, and Christian Lundblad (2006), “Growth Volatility and Financial Market Liberalization,” Journal of International Money and Finance, 25 (3), 370-403.
Bernanke, Ben S., and Alan S. Blinder (1992), “The Federal Funds Rate and the Channels of Monetary Transmission,” American Economic Review, 82 (4), 901-921.
Bernanke, Ben S., and Mark Gertler (1989), “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, 79 (1), 14-31.
Bernanke, Ben S., and Mark Gertler (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives, 9 (4), 27-48. Bernanke, Ben, Mark Gertler, and Simon Gilchrist (1999), “The Financial Accelerator in a Quantitative Business Cycle Framework,” in Handbook of Macroeconomics edited by John Taylor and Michael Woodford.
Cecchetti, Stephen G., Alfonso Flores-Lagunes, and Stefan Krause (2005), “Assessing the Sources of Changes in the Volatility of Real Growth” in The Changing Nature of the Business Cycle, Reserve Bank Of Australia 2005 Conference, 11–12 July 2005.
Chatterjee, Partha, and Malik Shukayev (2005), “Are Average Growth Rate and Volatility Related?,” University of Minnesota mimeo.
Clarida, Richard, Jordi Gali, and Mark Gertler (2000), “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” Quarterly Journal of Economics, 115 (1, February), 147-180.
Cochrane, John, H. (1988), “How Big is the Random Walk in GNP?” Journal of Political Economy, 96, 893-920.
Denizer, Cevdet A., Murat F. Iyigun, and Ann Owen (2002), “Finance and Macroeconomic Volatility,” Contributions to Macroeconomics, 2 (1, Article 7), 1-30.
Döpke, Jörg (2004), “How Robust is the Empirical Link between Business-Cycle Volatility and Long-Run Growth in OECD Countries?,” International Review of Applied Economics, 18 (1, January), 103–121.
Easterly, William, Roumeen Islam, and Joseph E. Stiglitz (2002), “Shaken and Stirred: Explaining Growth Volatility,” in Annual World Bank Conference on Development Economics edited by Boris Pleskovic and Nicholas Stern, World Bank and Oxford University Press, Washington, D.C., 191-211.
Engle, R. F. (1974), “Band Spectrum Regression,” International Economic Review, 15 (February), 1-11.
Eozenou, Patrick (2008), “Financial Integration and Macroeconomic Volatility: Does Financial Development Matter?” European University Institute mimeo.
Fatás, Antonio (2000), “Do Business Cycles Cast Long Shadows? Short-Run Persistence and Economic Growth,” Journal of Economic Growth, 5 (June), 147-162.
Gali, Jordi, and Mohamad Hammour (1991), “Long-run Effects of Business Cycles,” Columbia University mimeo. Global Development Network Growth Database, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20701055~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html.
Greenwald, Bruce C. and Joseph E. Stiglitz (1993), “Financial Market Imperfections and Business Cycles,” Quarterly Journal of Economics, 108(1), 77-114.
Heston, Alan, Robert Summers, and Bettina Aten (2002), “Penn World Tables Version 6.1,” Center for International Comparisons, University of Pennsylvania.
Kaldor, Nicholas (1954), “The Relation of Economic Growth and Cyclical Fluctuations,” Economic Journal, 64 (253, March), 53-71.
Kashyap, Anil K., and Jeremy C. Stein (1995), “The Impact of Monetary Policy on Bank Balance Sheets,” Carnegie-Rochester Conference Series on Public Policy, 42 (June), 151-195.
King, Robert G., and Ross Levine (1993a), “Finance and Growth: Schumpeter Might be Right,” Quarterly Journal of Economics, 108 (3), 717-738.
King, Robert G., and Ross Levine (1993b), “Finance, Entrepreneurship, and Growth: Theory and Evidence,” Journal of Monetary Economics, 32 (3), 513-542.
Kiyotaki, Nobuhiro, and John Moore (1997), “Growth Cycles,” Journal of Political Economy, 102 (2), 211-248.
Koren, Miklós, and Silvana Tenreyro (2007), “Volatility and Development,” Quarterly Journal of Economics, 122 (1, February 2007), 243-287.
Kunieda, Takuma (2008), “Financial Development and Volatility of Growth Rates: New Evidence,” Ryukoku University mimeo.
Levine, Ross (1997), “Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature, 35 (2), 688-726.
Levine, Ross, and Sara Zervos (1998), “Stock Markets, Banks, and Economic Growth,” American Economic Review, 88 (3), 537-558.
Levine, Ross, Norman V. Loayza, and Thorsten Beck (2000), “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics, 46 (1), 31-77.
Levy, Daniel, and Hashem Dezhbakhsh (2003), “International Evidence on Output Fluctuation and Shock Persistence,” Journal of Monetary Economics, 50 (7, October), 1499-1530.
Lopez, Jose A., and Mark M. Spiegel (2002), “Financial Structure and Macroeconomic Performance over the Short and Long-run,” Pacific Basin Working Paper Series No. PB02-05.
Meltzer, Allan H. (1990), “Unit Roots, Investment Measures and Other Essays,” Carnegie-Rochester Conference Series on Public Policy, 32 (Spring), l-6.
Mills, Terence C. (2000), “Business Cycle Volatility and Economic Growth: A Reassessment,” Journal of Post-Keynesian Economics, 23 (1), 107–116.
Mobarak, Ahmed M. (2005), “Democracy, Volatility and Economic Development,” Review of Economics and Statistics, 87 (2, May), 348-361.
Obstfeld, Maurice (1994), “Risk-Taking, Global Diversification, and Growth,” American Economic Review, 84 (5, December), 1310-1329.
Phumiwasana, Triphon (2003), “Financial Structure, Economic Growth and Stability,” Claremont Graduate University. Polity IV Project: Political Regime Characteristics and Transitions, 1800-2007, http://www.systemicpeace.org/polity/polity4.htm.
Priestley, M. B. (1981), “Spectral Analysis and time Series,” Vol. 1&2, Academic Press, London.
Raddatz, Claudio (2006), “Liquidity Needs and Vulnerability to Financial Underdevelopment,” Journal of Financial Economics, 80 (3), 677–722.
Rajan, Raghuram G. and Luigi Zingales (1998), “Financial Dependence and Growth,” American Economic Review, 88 (3, June), 559-586.
Ramey, Garey, and Valerie Ramey (1995), “Cross-Country Evidence on the Link between Volatility and Growth,” American Economic Review, 85 (5, December), 1138-51.
Ramey, Garey, and Valerie Ramey (2006), “Response to Chatterjee-Shukayev,” UCSD mimeo.
Silva, Gisele Ferreira da (2002), “The Impact of Financial System Development on Business Cycles Volatility: Cross-Country Evidence,” Journal of Macroeconomics, 24 (2), 233-53.
Stadler, George, W. (1986), “Real Versus Monetary Business Cycle Theory and the Statistical Characteristics of Output Fluctuation,” Economics Letters, 22, 51-54.
Stadler, George, W. (1990), “Business Cycles Models with Endogenous Technology,” American Economic Review, 4, 763-778.
Tharavanij, Piyapas (2007), “Capital Market and Business Cycle Volatility,” Monash University mimeo.
World Development Indicators, World Bank.