This paper provides evidence of a causal and economically important effect of financial development on volatility. In contrast to the existing literature, the identification strategy is based on the differences in sensitivities to financial conditions across industries. The results show that sectors with larger liquidity needs are more volatile and experience deeper crises in financially underdeveloped countries. At the macro level, the results suggest that changes in financial development can generate important differences in aggregate volatility. An additional finding of this paper is that financially underdeveloped countries partially protect themselves from volatility by concentrating less output in sectors with large liquidity needs. Nevertheless, this insulation mechanism seems to be insufficient to reverse the effects of financial underdevelopment on within-sector volatility. Finally, this paper provides new evidence that: (i) financial development affects volatility mainly through the intensive margin (output per firm); (ii) both, the quality of information generated by firms, and the development of financial intermediaries, have independent effects on sectoral volatility, (iii) the development of financial intermediaries is more important than the development of equity markets for the reduction of volatility. I am grateful to Daron Acemoglu and Ricardo Caballero for extremely helpful comments and discussion.

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, while the macroeconomic evidence remains inconclusive. At the same time, some studies argue that financial globalization enhances macroeconomic stability in developing countries, while others argue the opposite. We attempt to provide a unified conceptual framework for organizing this vast and growing literature, particularly emphasizing recent approaches to measuring the catalytic and indirect benefits to financial globalization. Indeed, we argue that the indirect effects of financial globalization on financial sector development, institutions, governance, and macroeconomic stability are likely to be far more important than any direct impact via capital accumulation or portfolio diversification. This perspective explains the failure of research based on crosscountry growth regressions to find the expected positive effects of financial globalization and points to newer approaches that are potentially more useful and convincing. Kose, Prasad and Wei are in the IMF’s Research Department. Rogoff is at Harvard University. We are grateful for helpful comments from numerous colleagues and participants at various seminars where earlier versions of this paper were presented. We are especially grateful to Roger Gordon and three anonymous referees whose comments have helped sharpen the exposition. Lore Aguilar, Cigdem Akin, Dionysios Kaltis and Ashley Taylor provided excellent research assistance. The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the IMF or IMF policy. 1 I.

In theory, better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions. This paper finds that the volatility of industrial output is lower in coun-tries with more bank credit. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is reduced less strongly. Volatility dampening is achieved via countercyclical borrowing: At the firm level, short-term borrowing is less (or more negatively) correlated with sales and inventories in countries with high levels of bank credit. THERE IS A DEBATE ABOUT THE EFFECT OF FINANCIAL INTERMEDIARIES—or financial development more generally—on the volatility of output. In theory, the effect on volatility of having more financial intermediation is ambiguous, depending on the stage of the country’s development (Aghion, Bacchetta, and Banerjee (2004)) or the type of shocks that affect the economy (e.g., real vs. monetary shocks as in Bacchetta and Caminal (2000), or credit demand versus credit supply shocks as in Morgan, Rime, and Strahan (2004)). The existing empirical evidence is also inconclusive. For instance, while Acemoglu et al. (2003) show that macroeconomic aggregates are less volatile in more developed countries, Beck, Lundberg, and Majnoni (2004) find no robust relation between financial intermediation and output volatility when considering different types of macro shocks. Understanding output volatility is important because volatility has a negative effect on growth (Ramey and Ramey (1995), Aghion et al. (2005)), in other words, because stability breeds growth. This paper revisits the debate on finance and volatility using industry-level and firm-level data. From the perspective of a financially constrained firm,

This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.

Abstract. This paper investigates whether stock market development raises economic growth in Nigeria, by employing the error correction approach. The econometric results indicate that stock market development (market capitalization-GDP ratio) increases economic growth. The recommendations therein include: removal of impediments to stock market development which include tax, legal, and regulatory barriers; development of the nation’s infrastructure to create an enabling environment for where business can strive; employment of policies that will increase the productivity and efficiency of firms as well encourage them to access capital on the stock market; enhancement of the capacity of the Nigeria Security and Exchange Commission to facilitate the growth of the stock market, restore the confidence of stock market participants and safeguard the interest of shareholders by checking sharp practices of market operators (particularly speculators). 1.

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In this paper we analyze empirically how labor market institutions influence the cyclical volatility of output and inflation in a sample of 20 OECD countries. Our results suggest that highly coordinated wage bargaining system have a dampening impact on inflation volatility, whereas countries characterized by high union density tend to experience more volatile movements in output. JEL Classification: E31, E32

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Abstract: In the literature on endogenous growth, the link between capital markets development and economic growth has received much attention. Although there are many studies regarding this aspect, approaches on emergent ex-communist countries ’ economies, especially for Romania, are very few comparatively to the general cases. Our paper examines the correlation between capital market development and economic growth in Romania using a regression function and VAR models. The results show that the capital market development is positively correlated with economic growth, with feed-back effect, but the strongest link is from economic growth to capital market, suggesting that financial development follows economic growth, economic growth determining financial institutions to change and develop. Key words: time-series; political economy; economic growth; capital market development

The forces shaping the revolution in banking and capital markets have radically changed the financial landscape during the past three decades. A remarkable feature of this changing new land-scape has been the astonishing rate of internationalisation of the financial system in the last two decades, with emerging markets becoming increasingly important participants. At times this participation has led to excessive reliance on foreign financing, making the participa-tion of these countries in the global financial system more vulnerable to shifts in expectations and perceptions. The sovereign debt management strategy suffered from many structural weaknesses, failing to take into account international best practices in financing budget deficits and developing ∗This article is based on OECD Development Centre Paper no. 260, New Strategies for Emerging Domestic Sovereign Bond Markets (DEV/DOC(2007)3). It benefited from various presentations