Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries

36 Pages Posted: 25 Apr 2019

See all articles by Kangni Kpodar

Kangni Kpodar

International Monetary Fund (IMF)

Maelan Le Goff

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Raju Jan Singh

World Bank

Date Written: March 2019

Abstract

This paper contributes to the literature by looking at the possible relevance of the structure of the financial system-whether financial intermediation is performed through banks or markets-for macroeconomic volatility, against the backdrop of increased policy attention on strengthening growth resilience. With low-income countries (LICs) being the most vulnerable to large and frequent terms of trade shocks, the paper focuses on a sample of 38 LICs over the period 1978-2012 and finds that banking sector development acts as a shock-absorber in poor countries, dampening the transmission of terms of trade shocks to growth volatility. Expanding the sample to 121 developing countries confirms this result, although this role of shock-absorber fades away as economies grow richer. Stock market development, by contrast, appears neither to be a shock-absorber nor a shock-amplifier for most economies. These findings are consistent across a range of econometric estimators, including fixed effect, system GMM and local projection estimates.

Keywords: Financial sector development, Economic stabilization, Real sector, International capital markets, Terms of trade, Banks, stock markets, terms of trade shocks, growth volatility, volatility, GMM, financial development, shock-absorber, sector development

JEL Classification: F4, G20, O1, F40, O10, E01, G21, L31, E52, G2

Suggested Citation

Kpodar, Kangni and Le Goff, Maelan and Singh, Raju Jan, Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries (March 2019). IMF Working Paper No. 19/68, Available at SSRN: https://ssrn.com/abstract=3377468

Kangni Kpodar (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Maelan Le Goff

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Raju Jan Singh

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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