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Further Evidence on the Link Between Finance and Cyclical Fluctuations

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  • Ali F. Darrat

    (Department of Economics & Finance, CAB, Louisiana Tech University)

  • Mahmoud Haj

Abstract

This paper explores the possibility that financial market development mitigates cyclical fluctuations in several developing countries. The paper uses the GARCH approach to account for the time-varying behavior of macroeconomic volatility, and distinguishes between overall and sectoral macroeconomic volatility. Results from co-integration and error-correction models suggest that financial market development (alternatively measured) does exert a robust long-term dampening effect on macroeconomic volatility. In contrast, short-term effects of financial development on cyclical fluctuations are generally tenuous, or non-existent. These findings imply that financial reforms can contribute to macroeconomic stability, but only if these reforms persist over a prolonged period of time. The results also suggest that financial reforms impact economic sectors differently across the countries examined.

Suggested Citation

  • Ali F. Darrat & Mahmoud Haj, 2001. "Further Evidence on the Link Between Finance and Cyclical Fluctuations," Working Papers 0139, Economic Research Forum, revised 12 2001.
    • Handle: RePEc:erg:wpaper:0139
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    References listed on IDEAS

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