Financial Volatility and Economic Growth

33 Pages Posted: 1 Jan 2020

See all articles by Jon Danielsson

Jon Danielsson

London School of Economics - Systemic Risk Centre

Marcela Valenzuela

Pontificia Universidad Católica de Chile

Ilknur Zer

Board of Governors of the Federal Reserve System

Date Written: November 12, 2019

Abstract

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

Danielsson, Jon and Valenzuela, Marcela and Zer, Ilknur, Financial Volatility and Economic Growth (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=3502793 or http://dx.doi.org/10.2139/ssrn.3502793

Jon Danielsson

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44.207.955.6056 (Phone)

HOME PAGE: http://www.riskreasearch.org

Marcela Valenzuela (Contact Author)

Pontificia Universidad Católica de Chile ( email )

Vicuña Mackenna 4860
Santiago, R. Metropolitana 7520421
Chile

Ilknur Zer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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