Financial Intermediary Development and Growth Volatility : Do Intermediaries Dampen or Magnify Shocks?

The authors extend the recent literature on the link between financial development and economic volatility by focusing on the channels through which the development of financial intermediaries affects economic volatility. Their theoretical model predicts that well-developed financial intermediaries dampen the effect of real sector shocks on the volatility of growth while magnifying the effect of monetary shocks-suggesting that, overall, financial intermediaries have no unambiguous effect on growth volatility. The authors test these predictions in a panel data set covering 63 countries over the period 1960-97, using the volatility of terms of trade to proxy for real volatility, and the volatility of inflation to proxy for monetary volatility. They find no robust relationship between the development of financial intermediaries and growth volatility, weak evidence that financial intermediaries dampen the effect of terms of trade volatility, and evidence that financial intermediaries magnify the impact of inflation volatility in low- and middle-income countries.

Bibliographic Details

Main Authors:	Lundberg, Mattias, Beck, Thorsten, Majnoni, Giovanni
Language:	English en_US
Published:	World Bank, Washington, DC 2001-11
Subjects:	ACCELERATOR, ACCELERATOR EFFECT, ASYMMETRIC INFORMATION, BALANCE SHEETS, BANK LENDING, BANKS, BONDS, CAPITAL MARKETS, CONSUMERS, CORPORATE CONTROL, CREDIT RATIONING, DEMAND CURVE, DEPOSITS, DEVELOPED COUNTRIES, ECONOMETRIC ANALYSIS, ECONOMETRICS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, EMPIRICAL ANALYSIS, EQUILIBRIUM, EXPORTS, EXTERNAL FINANCE, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIARY DEVELOPMENT, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL SECTOR, FINANCIAL SECTOR DEVELOPMENT, FUNCTIONAL FORMS, GDP, GDP PER CAPITA, GROWTH RATE, IMPORTS, INCOME, INCOME COUNTRIES, INCOME GROUPS, INFLATION, INFLATION RATE, INPUT PRICES, INSTITUTIONAL ENVIRONMENT, INTEREST RATE, INTEREST RATES, M2, MARGINAL PRODUCTIVITY, MONETARY POLICIES, MONETARY POLICY, MORAL HAZARD, NET WORTH, OPEN ECONOMIES, OPTIMIZATION, OUTPUT, OVERLAPPING GENERATIONS MODEL, PER CAPITA INCOME, POLICY DECISIONS, POLICY MAKERS, PREDICTIONS, PRODUCTION FUNCTION, PRODUCTION TECHNOLOGY, PRODUCTIVITY, PROFIT MAXIMIZATION, PROFITABILITY, REAL GDP, RESERVE REQUIREMENTS, RETURNS TO SCALE, SAVINGS, SUPPLY CURVE, TERMS OF TRADE, TRADE SHOCKS, VOLATILITY, WEALTH FINANCIAL INTERMEDIATION, ECONOMIC SHOCKS, LOW-INCOME ECONOMIES, MIDDLE-INCOME ECONOMIES,
Online Access:	http://documents.worldbank.org/curated/en/2001/11/1631799/financial-intermediary-development-growth-volatility-intermediaries-dampen-or-magnify-shocks https://hdl.handle.net/10986/19440
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