The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth: Evidence for the Eastern Caribbean

30 Pages Posted: 20 Apr 2016

Date Written: December 3, 2015

Abstract

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.

Keywords: Finance and Development, Economic Adjustment and Lending, Public Sector Economics, Financial Economics, Macro-Fiscal Policy, Economic Policy, Institutions and Governance, Public Finance Decentralization and Poverty Reduction, Trade and Multilateral Issues

Suggested Citation

Brueckner, Markus and Carneiro, Francisco Galrao, The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth: Evidence for the Eastern Caribbean (December 3, 2015). World Bank Policy Research Working Paper No. 7507. Available at SSRN: https://ssrn.com/abstract=2698970

Markus Brueckner (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Francisco Galrao Carneiro

The World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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