Financial intermediary development and growth volatility : do intermediaries dampen or magnify shocks?

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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;	Collection Title:	Policy, Research working paper series ; no. WPS 2707
Date Stored:	2001/12/17	Document Date:	2001/11/30
Document Type:	Policy Research Working Paper	Language:	English
Major Sector:	Finance	Report Number:	WPS2707
Sub Sectors:	Financial Sector Development	SubTopics:	Environmental Economics & Policies; Payment Systems & Infrastructure; Economic Theory & Research; Financial Crisis Management & Restructuring; Fiscal & Monetary Policy; Financial Intermediation
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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	PDF 49 pages	WPS2707	0.19

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