Hostname: page-component-7dd5485656-k8lnt Total loading time: 0 Render date: 2025-10-30T20:17:04.477Z Has data issue: false hasContentIssue false
  • English
  • Français

FINANCIAL DEVELOPMENT, SHOCKS, AND GROWTH VOLATILITY

Published online by Cambridge University Press:  25 March 2013

Debdulal Mallick
Debdulal Mallick*
Affiliation:
Deakin University
*
Address correspondence to: Debdulal Mallick, School of Accounting, Economics and Finance, Deakin University, Burwood, VIC 3125, Australia; e-mail: dmallic@deakin.edu.au.
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Keywords

Financial DevelopmentShocksGrowth VolatilityBusiness CycleSpectral Analysis

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 3 , April 2014 , pp. 651 - 688
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Acemoglu, Daron, Johnson, Simon, Robinson, James, and Thaicharoen, Yunyong (2003) Institutional causes, macroeconomic symptoms: Volatility, crises and growth. Journal of Monetary Economics 50 (1), 49–123.Google Scholar
Acemoglu, Daron and Zilibotti, Fabrizio (1997) Was Prometheus unbound by chance? Risk, diversification, and growth. Journal of Political Economy 105 (4), 709–751.CrossRefGoogle Scholar
Adrian, Tobias and Rosenberg, Joshua (2008) Stock returns and volatility pricing: The short-run and long-run components of market risk. Journal of Finance 63 (6), 2997–3030.Google Scholar
Agénor, Pierre-Richard (2001) Business Cycles, Economic Crises, and the Poor: Testing for Asymmetric Effects. Policy research working paper 2700, World Bank, Washington, DC.Google Scholar
Agénor, Pierre-Richard, McDermott, Christopher J., and Prasad, Eswar (2000) Macroeconomic fluctuations in developing countries: Some stylized facts. World Bank Economic Review 14 (2), 251–285.Google Scholar
Aghion, Philippe, Angeletos, George-Marios, Banerjee, Abhijit V., and Manova, Kalina (2010) Volatility and growth: Credit constraints and the composition of investment. Journal of Monetary Economics 57 (3), 246–265.CrossRefGoogle Scholar
Aghion, Philippe and Banerjee, Abhijit (2005) Volatility and Growth. New York: Oxford University Press.Google Scholar
Aghion, Philippe, Banerjee, Abhijit, and Piketty, Thomas (1999) Dualism and macroeconomic volatility. Quarterly Journal of Economics 114 (4), 1359–1397.Google Scholar
Aguiar, Mark and Gopinath, Gita (2007) Emerging market business cycles: The cycle is the trend. Journal of Political Economy 115 (1), 69–102.Google Scholar
Ahmed, Shagil, Levin, Andrew, and Wilson, Beth A. (2004) Recent U.S. macroeconomic stability: Good policies, good practices and good luck. Review of Economics and Statistics 86 (3), 824–832.Google Scholar
Aizenman, Joshua and Powell, Andrew (2003) Volatility and financial intermediation. Journal of International Money and Finance 22 (5), 657–679.Google Scholar
Backus, David K., Kehoe, Patrick J., and Kydland, Finn E. (1994) Relative price movements in dynamic general equilibrium models of international trade. In der Ploeg, Fredrick van (ed.), The Handbook of International Macroeconomics, pp. 62–96. Cambridge, MA: Blackwell.Google Scholar
Baxter, Marianne and King, Robert G. (1999) Measuring business cycles: Approximate band-pass filters for economic time series. Review of Economics and Statistics 81 (4), 575–593.Google Scholar
Beck, Thorsten, Demirgüç-Kunt, Ashli, and Levine, Ross (2000) A new database on the structure and development of the financial sector. World Bank Economic Review 14 (3), 597–605 (updated November 2008).CrossRefGoogle Scholar
Beck, Thorsten, Lundberg, Mattias, and Majnoni, Giovanni (2006) Financial intermediary development and growth volatility: Do intermediaries dampen or magnify shocks? Journal of International Money and Finance 25 (7), 1146–1167.Google Scholar
Bernanke, Ben S. and Gertler, Mark (1989) Agency costs, net worth, and business fluctuations. American Economic Review 79 (1), 14–31.Google Scholar
Bernanke, Ben S. and Gertler, Mark (1995) Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives 9 (4), 27–48.Google Scholar
Bernanke, Ben, Gertler, Mark, and Gilchrist, Simon (1998) The financial accelerator in a quantitative business cycle framework. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics 1C, pp. 1341–1393. Amsterdam: Elsevier.Google Scholar
Breen, Richard and García-Peñalosa, Cecilia (2005) Income inequality and macroeconomic volatility: An empirical investigation. Review of Development Economics 9 (3), 380–398.Google Scholar
Chauvet, Marcelle, Senyuz, Zeynep, and Yoldas, Emre (2010) What Does Realized Volatility Tell Us about the Macroeconomic Fluctuations? MPRA paper 34104.Google Scholar
Cochrane, John H. (1988) How big is the random walk in GNP? Journal of Political Economy 96 (5), 893–920.Google Scholar
Denizer, Cevdet A., Iyigun, Murat F., and Owen, Ann (2002) Finance and macroeconomic volatility. Contributions to Macroeconomics 2 (1), Article 7, 1–30.Google Scholar
Easterly, William, Islam, Roumeen, and Stiglitz, Joseph E. (2002) Shaken and stirred: Explaining growth volatility. In Pleskovic, Boris and Stern, Nicholas (eds.), Annual World Bank Conference on Development Economics, pp. 191–211. Washington, DC.: World Bank and Oxford University Press.Google Scholar
Engle, R.F. (1974) Band spectrum regression. International Economic Review 15 (1), 1–11.Google Scholar
Fatás, Antonio (2000) Do business cycles cast long shadows? Short-run persistence and economic growth. Journal of Economic Growth 5 (2), 147–162.CrossRefGoogle Scholar
Global Development Network Growth Database (2001). http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,contentMDK:20701055~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html.Google Scholar
Greenwald, Bruce C. and Stiglitz, Joseph E. (1993) Financial market imperfections and business cycles. Quarterly Journal of Economics 108 (1), 77–114.Google Scholar
Heston, Alan, Summers, Robert, and Aten, Bettina (2006) Penn World Tables, Version 6.2. Center for International Comparisons, University of Pennsylvania.Google Scholar
Hnatkovska, Viktoria and Loayza, Norman (2005) Volatility and growth. In Aizenman, Joshua and Pinto, Brian (eds.), Managing Economic Volatility and Crises: A Practitioner's Guide, pp. 65–100. New York: Cambridge University Press.Google Scholar
Hodrick, Robert and Prescott, Edward C. (1997) Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking 29 (1), 1–16.Google Scholar
Iyigun, Murat F. and Owen, Ann L. (2004) Income inequality, financial development, and macroeconomic fluctuations. Economic Journal 114 (495), 352–376.Google Scholar
Kiyotaki, Nobuhiro and Moore, John (1997) Credit cycles. Journal of Political Economy 102 (2), 211–248.Google Scholar
Koren, Miklós and Tenreyro, Silvana (2007) Volatility and development. Quarterly Journal of Economics 122 (1), 243–287.Google Scholar
La Porta, Rafael, Lopez-De-Silanes, Florencio, and Shleifer, Andrei (2008) The economic consequences of legal origin. Journal of Economic Literature 46 (2), 285–332.Google Scholar
La Porta, Rafael, Lopez-De-Silanes, Florencio, Shleifer, Andrei, and Vishny, Robert W. (1997) Legal determinants of external finance. Journal of Finance 52 (3), 1131–1150.Google Scholar
Laursen, Thomas and Mahajan, Sandeep (2005) Volatility, income distribution, and poverty. In Aizenman, Joshua and Pinto, Brian (eds.), Managing Economic Volatility and Crises: A Practitioner's Guide, pp. 101–136. New York: Cambridge University Press.CrossRefGoogle Scholar
Levine, Ross (1997) Financial development and economic growth: Views and agenda. Journal of Economic Literature 35 (2), 688–726.Google Scholar
Levy, Daniel and Dezhbakhsh, Hashem (2003) International evidence on output fluctuation and shock persistence. Journal of Monetary Economics 50 (7), 1499–1530.CrossRefGoogle Scholar
Lewbel, A. (2012) Using heteroskedasticity to identify and estimate mismeasured and endogenous regressor models. Journal of Business and Economic Statistics 30 (1), 67–80.Google Scholar
Lopez, Jose A. and Spiegel, Mark M. (2005) Financial structure and macroeconomic performance over the short and long run. In Cho, L.J., Cho, D., and Kim, Y.H. (eds.), Macroeconomic Implications of Post-Crisis Structural Changes, pp. 75–103. Seoul: Korea Development Institute.Google Scholar
Mendoza, Enrique (1995) The terms of trade, the real exchange rate, and economic fluctuations. International Economic Review 36 (1), 101–137.Google Scholar
Mobarak, Ahmed M. (2005) Democracy, volatility and economic development. Review of Economics and Statistics 87 (2), 348–361.Google Scholar
Polity IV Project (2009) Political regime characteristics and transitions, 1800–2007. http://www.systemicpeace.org/polity/polity4.htm.Google Scholar
Priestley, M.B. (1981) Spectral Analysis and Time Series, vols. 1 and 2. London: Academic Press.Google Scholar
Raddatz, Claudio (2006) Liquidity needs and vulnerability to financial underdevelopment. Journal of Financial Economics 80 (3), 677–722.Google Scholar
Ramey, Valerie A. and Ramey, Garey (1995) Cross-country evidence on the link between volatility and growth. American Economic Review 85 (5), 1138–1151.Google Scholar
Silva, Gisele Ferreira da (2002) The impact of financial system development on business cycles volatility: Cross-country evidence. Journal of Macroeconomics 24 (2), 233–253.Google Scholar
Stadler, George W. (1986) Real versus monetary business cycle theory and the statistical characteristics of output fluctuation. Economics Letters 22 (1), 51–54.Google Scholar
Stadler, George W. (1990) Business cycles models with endogenous technology. American Economic Review 80 (4), 763–778.Google Scholar
Stockman, Alan C. and Tesar, Linda L. (1995) Tastes and technology in a two-country model of the business cycle: Explaining international comovements. American Economic Review 85 (1), 168–185.Google Scholar
Tharavanij, Piyapas (2007) Capital Market and Business Cycle Volatility. Monash University economics discussion paper.Google Scholar
White, Halbert (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48 (4), 817–838.Google Scholar
Wolf, Holger (2004) Accounting for consumption volatility differences. IMF Staff Papers 51(Special Issue), 109–125.Google Scholar
Wolf, Holger (2005) Volatility: Definitions and consequences. In Aizenman, Joshua and Pinto, Brian (eds.), Managing Economic Volatility and Crises: A Practitioner's Guide, pp. 45–64. New York: Cambridge University Press.Google Scholar
World Development Indicators (2009) World Bank. http://data.worldbank.org/data-catalog/world-development-indicators.Google Scholar