Financial development, shocks, and growth volatility

Mallick, Debdulal 2014, Financial development, shocks, and growth volatility, Macroeconomic dynamics, vol. 18, no. 3, pp. 651-688.

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Title Financial development, shocks, and growth volatility
Author(s) Mallick, Debdulal
Journal name Macroeconomic dynamics
Volume number 18
Issue number 3
Start page 651
End page 688
Total pages 38
Publisher Cambridge University Press
Place of publication Cambridge, England
Publication date 2014-04
ISSN 1365-1005
1469-8056
Keyword(s) financial development
shocks
growth volatility
business cycle
spectral analysis
Summary This paper uses spectral theory to develop the following two testable hypotheses in a unified framework for the predictions of business-cycle and endogenous growth models: (i) financial development affects only business-cycle volatility; and (ii) shocks affect both business-cycle volatility and long-run volatility of GDP growth. In other words, volatility caused by shocks is more persistent than that caused by financial underdevelopment. We decompose the business-cycle and long-run volatility by the spectral method and then test the hypotheses at the cross-country level. Empirical evidence provides support for both hypotheses. Higher private credit, a bank-based measure of financial development, dampens business-cycle volatility but not long-run volatility. Volatility of shocks, as measured by the volatility of changes in the terms of trade, magnifies both business-cycle and long-run volatility. The results are robust to accounting for endogeneity, a market-based measure of financial development, and an alternative method of volatility decomposition.
Language eng
Field of Research 140212 Macroeconomics (incl Monetary and Fiscal Theory)
Socio Economic Objective 910199 Macroeconomics not elsewhere classified
HERDC Research category C1 Refereed article in a scholarly journal
Persistent URL http://hdl.handle.net/10536/DRO/DU:30061902

Document type: Journal Article
Collections: Faculty of Business and Law
School of Accounting, Economics and Finance
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