The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth

This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980–2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.

Bibliographic Details

Main Authors:	Brüeckner, Markus, Carneiro, Francisco
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2015-12
Subjects:	GROWTH RATES, OUTPUT VOLATILITY, MONETARY POLICY, CAPITAL MARKETS, DEPOSIT, FINANCIAL SERVICES, CAPITA INCOME, ECONOMIC GROWTH, SMALL ECONOMIES, EFFECTS OF VOLATILITY, ECONOMIC GROWTH RATES, AMERICAN ECONOMIC REVIEW, INTERNATIONAL COUNTRY RISK GUIDE, MONETARY ECONOMICS, EFFECT OF VOLATILITY ON GROWTH, FLOW OF FUNDS, COUNTRY FIXED EFFECTS, INCOME, INTEREST, ECONOMIC VOLATILITY, GOVERNMENT SPENDING, EXCHANGE, GROWTH VOLATILITY, LIQUIDITY, DEVELOPING COUNTRIES, POLITICAL ECONOMY, DEVELOPING ECONOMIES, FISCAL POLICY, LIQUIDITY RISK, WORLD DEVELOPMENT INDICATORS, CAUSAL EFFECT OF VOLATILITY ON GROWTH, INTERACTION TERMS, PRICE, TAX, FINANCIAL INTEGRATION, LONG-TERM INVESTMENT, DEVELOPED COUNTRIES, LINK BETWEEN VOLATILITY, BANK LENDING, ECONOMIC ACTIVITY, STANDARD DEVIATION, FISCAL POLICIES, GLOBAL ECONOMY, PER CAPITA INCOME, TRADE SHOCKS, MIDDLE INCOME, GROWTH EFFECT, PRICE VOLATILITY, CRISIS, POLITICAL POWER, INCREASE IN VOLATILITY, STANDARD ERRORS, NATURAL DISASTERS, EMERGING MARKET, LOW- INCOME COUNTRIES, DEBT, PRIVATE INVESTMENT, FISCAL CONSOLIDATION, DEPOSIT INSURANCE, OPEN ECONOMY, BUSINESS CYCLE, INCOME LEVELS, REVIEW OF ECONOMICS, FLUCTUATIONS, RECESSIONS, EXOGENOUS VOLATILITY, GROSS DOMESTIC PRODUCT, COMMODITY PRICE, TAX BASE VARIABILITY, TAXES, GROWTH EFFECTS, EMERGING MARKETS, POLICY UNCERTAINTY, CREDIT CONSTRAINTS, ECONOMIC PERFORMANCE, INTERNATIONAL TRADE, VOLATILITY, COUNTRY RISK, CREDIT CONSTRAINT, FINANCIAL CRISIS, FUTURE, MACROECONOMICS, OUTPUT GAP, INCOME DISTRIBUTION, CAPITAL FLOWS, PRIVATE SECTOR, SHARES, FINANCIAL SECTOR STABILITY, REAL EXCHANGE RATE, RAPID EXPANSION, EXCHANGE RATE REGIME, UNDERDEVELOPMENT, CAPITA GROWTH, SECURITIES, OUTPUT, DEMOCRACIES, INSTRUMENTAL VARIABLES, EXPOSURE, INSURANCE, BUSINESS CYCLES, ECONOMIC DEVELOPMENT, CYCLICAL FISCAL POLICY, INTERNATIONAL BEST PRACTICES, TRADE, PER CAPITA INCOME LEVELS, INTERNATIONAL MONETARY FUND, FINANCIAL DEVELOPMENT, FINANCIAL MARKET, GROWTH RATE, INVESTMENT, MACROECONOMIC VOLATILITY, DOMESTIC CREDIT, SHARE, GROWTH PERFORMANCE, BALANCE SHEETS, FINANCIAL MARKETS, IMPACT OF VOLATILITY, BANKING, INTERACTION TERM, EXTERNAL SHOCKS, LESS DEVELOPED ECONOMIES, EFFECT OF VOLATILITY, MACROECONOMIC POLICIES, EXCHANGE RATE, ECONOMIC SHOCKS, FINANCIAL SECTOR, OPEN ECONOMIES, COMMODITY, ADVERSE EFFECTS, GROWTH,
Online Access:	http://documents.worldbank.org/curated/en/2015/12/25517482/effects-volatility-fiscal-policy-cyclicality-financial-development-growth-evidence-eastern-caribbean https://hdl.handle.net/10986/23470
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