Finance and Macroeconomic Volatility
29 Pages Posted: 5 Oct 2000
Date Written: June 2000
Countries with more developed financial sectors experience fewer fluctuations in real per capita output, consumption, and investment growth. But it matters how the financial sector develops: the proportion of credit provided to the private sector is important in explaining volatility.
Countries with more developed financial sectors experience fewer fluctuations in real per capita output, consumption, and investment growth. But the manner in which the financial sector develops matters.
The relative importance of banks in the financial system is important in explaining consumption and investment volatility. The proportion of credit provided to the private sector best explains volatility of consumption and output.
Denizer, Iyigun, and Owen generate their main results using fixed-effects estimation with panel data from 70 countries for the years 1956-98.
Their general findings suggest that the risk management and information processing provided by banks may be especially important in reducing consumption and investment volatility. The simple availability of credit to the private sector probably helps smooth consumption and GDP.
This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to understand the links between finance and macroeconomic volatility. The authors may be contacted at firstname.lastname@example.org, email@example.com, or firstname.lastname@example.org.
JEL Classification: D31, E32
Suggested Citation: Suggested Citation