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

36 Pages Posted: 16 May 2019

See all articles by Kangni Kpodar

Kangni Kpodar

International Monetary Fund (IMF)

Maëlan Le Goff

Banque de France

Raju Jan Singh

World Bank

Date Written: May 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: banks, stock markets, terms of trade shocks, growth volatility

JEL Classification: F40; G20; O10

Suggested Citation

Kpodar, Kangni and Le Goff, Maëlan and Singh, Raju Jan, Financial Deepening, Terms of Trade Shocks and Growth in Low-Income Countries Countries (May 2019). Banque de France Working Paper, May 2019, WP # 719 , Available at SSRN: https://ssrn.com/abstract=3388662 or http://dx.doi.org/10.2139/ssrn.3388662

Kangni Kpodar

International Monetary Fund (IMF) ( email )

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

Maëlan Le Goff (Contact Author)

Banque de France ( email )

Paris
France

Raju Jan Singh

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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