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Does Financial Inclusion Amplify Output Volatility in Emerging and Developing Economies?

Author

Listed:
  • Tony Cavoli

    (University of South Australia)

  • Sasidaran Gopalan

    (Nanyang Technological University (NTU))

  • Ramkishen S. Rajan

    (National University of Singapore)

Abstract

This paper empirically investigates if, in what direction, and under what circumstances financial inclusion amplifies or moderates output volatility, which is a matter of concern for monetary policymakers in emerging and developing economies (EMDEs). The empirical estimation for a large panel of over 100 EMDEs spanning the period 1995 to 2013 finds a strong and persistent trade-off between higher financial inclusion and output stability. The paper also finds strong and robust evidence of non-linearity governing this relationship. Countries with high degrees of financial inclusion as well as those that are relatively lower income tend to experience a significant trade-off between financial inclusion and output stability. Further, the paper also finds that reckless financial inclusion coinciding with excessive credit growth tends to worsen output volatility.

Suggested Citation

  • Tony Cavoli & Sasidaran Gopalan & Ramkishen S. Rajan, 2020. "Does Financial Inclusion Amplify Output Volatility in Emerging and Developing Economies?," Open Economies Review, Springer, vol. 31(4), pages 901-930, September.
    • Handle: RePEc:kap:openec:v:31:y:2020:i:4:d:10.1007_s11079-019-09568-0
    DOI: 10.1007/s11079-019-09568-0
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    2. Ishraq Ahmed & Erick Kitenge, 2022. "Microfinance outreach and aggregate welfare," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(3), pages 652-669, April.
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    4. Foguesatto, Cristian Rogério & Righi, Marcelo Brutti & Müller, Fernanda Maria, 2024. "Is there a dark side to financial inclusion? Understanding the relationship between financial inclusion and market risk," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    5. Aidi Tang, 2023. "Financial Integration and International Dynamics: The Role of Volatility Shocks," Mathematics, MDPI, vol. 11(23), pages 1-27, November.

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    More about this item

    Keywords

    Financial inclusion; output volatility; credit growth; emerging and developing economies; panel data;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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