Financial Volatility and Economic Growth
33 Pages Posted: 1 Jan 2020
Date Written: November 12, 2019
We investigate the impact of financial volatility on economic growth, using a panel spanning 150 years and 74 countries. A positive shock to volatility and persistent high volatility lead to a short-term decrease in growth. Persistent low volatility affects growth differently: Initially leading to higher growth, but with a reversal two years hence, consistent with theories of how continued low risk environment induces higher risk-taking. The impact is stronger when volatility is low globally, during the post Bretton Woods era, and for countries experiencing high credit growth. Furthermore, long-lasting global volatility has a significant impact on capital flows, investment, and lending quality.
Keywords: Financia volatility, economic growth, credit booms
JEL Classification: E32, E44, G15
Suggested Citation: Suggested Citation