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Financial intermediary development and growth volatility : do intermediaries dampen or magnify shocks?, Volume 1
Author:Beck, Thorstein; Lundberg, Mattias; Majnoni, Giovanni; Date Stored:2001/12/17
Document Date:2001/11/30Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; Payment Systems & Infrastructure; Economic Theory & Research; Financial Crisis Management & Restructuring; Fiscal & Monetary Policy; Financial IntermediationLanguage:English
Major Sector:FinanceReport Number:WPS2707
Sub Sectors:Financial Sector DevelopmentCollection Title:Policy, Research working paper series ; no. WPS 2707
Volume No:1  

Summary: 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.

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