Financial development, shocks, and growth volatility

Mallick, Debdulal 2014, Financial development, shocks, and growth volatility, Macroeconomic dynamics, vol. 18, no. 3, pp. 651-688, doi: 10.1017/S1365100512000569.

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Title Financial development, shocks, and growth volatility
Author(s) Mallick, DebdulalORCID iD for 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
Keyword(s) financial development
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
DOI 10.1017/S1365100512000569
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
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