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Financial Intermediary Development and Growth Volatility: Do Intermediaries Dampen or Magnify Shocks? (2001)
| Citations: | 42 - 2 self |
BibTeX
@MISC{Beck01financialintermediary,
author = {Thorsten Beck and Mattias Lundberg and Giovanni Majnoni},
title = {Financial Intermediary Development and Growth Volatility: Do Intermediaries Dampen or Magnify Shocks?},
year = {2001}
}
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Abstract
We extend the recent literature on the link between financial development and economic volatility by focusing on the channels through which financial intermediary development affects economic volatility. Building on Bacchetta and Caminal (2000) our theoretical model predicts that the effect of real sector shocks on growth volatility is dampened by well-developed financial intermediaries, while monetary shocks are magnified, suggesting that, overall, there is no unambiguous effect of financial intermediaries on growth volatility. We test these predictions in a panel data set covering 63 countries over the period 1960-97, using the volatility of terms of trade and inflation to proxy for real and monetary volatility, respectively. We find (i) no robust relation between financial intermediary development and growth volatility, (ii) weak evidence that financial intermediaries dampen the effect of terms of trade volatility, and (iii) evidence that financial intermediaries magnify the impact of inflation volatility in lowand middle-income countries. * The World Bank. We would like to thank Hosook Hwang for outstanding research assistance and George Clarke, Robert Cull, Gregorio Impavido, Ross Levine, Rick Mishkin, and seminar participants at the World Bank and the Conference of the Latin American and Caribbean Economic Association for useful comments and suggestions. This paper's findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. 1.
Keyphrases
growth volatility financial intermediary development intermediary dampen financial intermediary world bank magnify shock economic volatility real sector shock robert cull rick mishkin monetary volatility outstanding research assistance unambiguous effect robust relation recent literature seminar participant caribbean economic association well-developed financial intermediary panel data set ross levine george clarke lowand middle-income country executive director hosook hwang useful comment monetary shock trade volatility financial development theoretical model weak evidence inflation volatility gregorio impavido
