Financial Systems, Growth, and Volatility

Financial Systems, Growth, and Volatility

This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth. It also examines the impact of credit on the composition of growth. The findings show that financial development smooths growth in gross domestic product and consumption per capita, but only up to a point. At high levels of credit, further credit is positively associated with volatility even after controlling for the quality of institutions and periods of financial crises. In large financial systems, finance may not help individuals smooth consumption volatility. The threshold at which finance's effect may be volatility enhancing may be lower than previously thought. In terms of the impact on growth, total credit (and credit to firms) has a nonlinear relationship, with rising credit supporting higher growth up to a point, beyond which the additional impact of finance on growth is negative. This can be explained by finance flowing into less productive activities (or drawing other resources into less productive activities). In addition, household credit is negatively related to manufacturing sector growth, although credit to firms has a positive relationship to manufacturing growth. This may be explained by the fact that much of household credit is used to finance the consumption (including imports) of goods and services broadly (not just manufacturing sector goods) or investment in housing.

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Bibliographic Details
Main Author: Islam, Roumeen
Format: Working Paper biblioteca
Language:English
en_US
Published: World Bank, Washington, DC 2016-06
Subjects:ENTERPRISE CREDIT, FINANCIAL SYSTEM DEVELOPMENT, GROWTH RATES, OUTPUT VOLATILITY, CREDIT MARKETS, MONETARY POLICY, DEPOSIT, BORROWER, CAPITA INCOME, FINANCIAL INNOVATION, ECONOMIC GROWTH, PEOPLE, AMERICAN ECONOMIC REVIEW, CAPITAL ACCUMULATION, MONETARY ECONOMICS, MARKET DEVELOPMENTS, GLOBAL MARKETS, INCOME, INTEREST, ENROLLMENT, FINANCIAL LIBERALIZATIONS, PRIVATE CREDIT, STOCK MARKET, FINANCIAL SECTOR POLICIES, INCOME GROUP, GROWTH VOLATILITY, EQUITY MARKET, POLITICAL ECONOMY, MORTGAGE, WELFARE, MORTGAGE LENDING, ASYMMETRIC INFORMATION, BORROWERS, TRADE OPENNESS, SUBSIDY, CORRUPTION, WEALTH, SAVING, INFLATION, INTERNATIONAL BANK, FINANCIAL CREDIT, FINANCIAL FRAGILITY, LEVELS OF CREDIT, EXTERNAL FINANCE, MACROECONOMIC STABILITY, STANDARD DEVIATION, SAVINGS, MORTGAGES, PER CAPITA INCOME, HOUSING FINANCE, MARKET DEVELOPMENT, MORAL HAZARD, ADVANCED ECONOMIES, HIGHER VOLATILITY, RISKY BORROWERS, CURRENT ACCOUNT, CRISIS, FINANCIAL INSTITUTIONS, DEBT, CAPITAL MARKET, FINANCIAL CRISES, HIGH INCOME, FINANCIAL FLOWS, BUSINESS CYCLE, INCOME LEVELS, MACROECONOMIC FLUCTUATIONS, FINANCIAL REFORMS, BANKERS, FLUCTUATIONS, BANK CREDIT, GROSS DOMESTIC PRODUCT, FINANCIAL SYSTEM, FINANCE, LIBERALIZATION, BANKS, EXPENDITURE, MORTGAGE CREDIT, EQUITY, HUMAN CAPITAL, FEDERAL RESERVE, CREDIT CONSTRAINTS, ECONOMIC PERFORMANCE, CAPITAL, VOLATILITY, BANKING CRISIS, LONG-RUN GROWTH, BANK, FOREIGN DIRECT INVESTMENT, SYSTEMIC BANKING CRISES, CREDIT, MACROECONOMICS, LEVEL OF DEVELOPMENT, INCOME DISTRIBUTION, HOUSEHOLD, EXPENDITURES, ENTERPRISE, CAPITAL FLOWS, PROPERTIES, PRIVATE SECTOR, REAL EXCHANGE RATE, UNDERDEVELOPMENT, CAPITA GROWTH, GLOBAL FINANCIAL MARKET, MONETARY SHOCKS, GROWTH RELATIONSHIP, ACCESS TO CREDIT, ECONOMIC DEVELOPMENT, FINANCIAL LIBERALIZATION, INTERNATIONAL MONETARY FUND, FINANCIAL DEVELOPMENT, FINANCIAL MARKET, MACROECONOMIC VOLATILITY, INVESTMENT, BARTER, FINANCIAL INTERMEDIATION, GROWTH REGRESSIONS, FINANCIAL INTERMEDIARIES, CREDIT EXTENSION, HOUSEHOLDS, COLLATERAL, FINANCIAL MARKETS, FINANCIAL ASSETS, RATE OF GROWTH, FINANCIAL INTERMEDIARY, EXTERNAL SHOCKS, INVESTMENTS, BORROWING, BANKING SUPERVISION, EXCHANGE RATE, RISK AVERSION, ENROLMENT RATE, BANKING CRISES, FINANCIAL SYSTEMS, CAPITAL ACCOUNT, FINANCIAL SECTOR DEVELOPMENT, FINANCIAL DEPTH, INEQUALITY, GROWTH,
Online Access:http://documents.worldbank.org/curated/en/2016/06/26511057/financial-systems-growth-volatility-searching-perfect-fit
https://hdl.handle.net/10986/24640
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Summary:This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth. It also examines the impact of credit on the composition of growth. The findings show that financial development smooths growth in gross domestic product and consumption per capita, but only up to a point. At high levels of credit, further credit is positively associated with volatility even after controlling for the quality of institutions and periods of financial crises. In large financial systems, finance may not help individuals smooth consumption volatility. The threshold at which finance's effect may be volatility enhancing may be lower than previously thought. In terms of the impact on growth, total credit (and credit to firms) has a nonlinear relationship, with rising credit supporting higher growth up to a point, beyond which the additional impact of finance on growth is negative. This can be explained by finance flowing into less productive activities (or drawing other resources into less productive activities). In addition, household credit is negatively related to manufacturing sector growth, although credit to firms has a positive relationship to manufacturing growth. This may be explained by the fact that much of household credit is used to finance the consumption (including imports) of goods and services broadly (not just manufacturing sector goods) or investment in housing.

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