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How does terms of trade volatility affect macroeconomic volatility? The roles of financial development and institutions

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  • Avom, Désiré
  • Kamguia, Brice
  • Ngameni, Joseph Pasky
  • Njangang, Henri

Abstract

This paper examines the effect of terms-of-trade volatility on growth volatility. It also investigates whether financial development and institutional quality mitigate the negative effect of terms-of-trade volatility on growth volatility. The model is empirically tested for 45 African countries over the period 1997–2017. The empirical strategy is based on the generalized method of moments, and the following results are established. Strong evidence is provided to support that terms of trade volatility increases growth volatility in African countries. The results further indicate that institutional quality mitigates the negative effect of terms-of-trade volatility. When financial development is considered, we provide evidence that financial development is a shock absorber, with financial institutions having a stronger effect than financial markets. These results are robust to the use of alternative measures of growth volatility, terms of trade volatility, and different specifications.

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  • Avom, Désiré & Kamguia, Brice & Ngameni, Joseph Pasky & Njangang, Henri, 2021. "How does terms of trade volatility affect macroeconomic volatility? The roles of financial development and institutions," International Economics, Elsevier, vol. 168(C), pages 98-114.
    • Handle: RePEc:eee:inteco:v:168:y:2021:i:c:p:98-114
    DOI: 10.1016/j.inteco.2021.08.004
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    Cited by:

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    More about this item

    Keywords

    Terms of trade volatility; Growth volatility; Financial institutions; Financial markets; Institutions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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