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Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries

Author

Listed:
  • Kangni Kpodar

    (Fonds Monétaire International, FERDI - Fondation pour les Etudes et Recherches sur le Développement International)

  • Maëlan Le Goff

    (Banque de France - Banque de France - Banque de France)

  • Singh Raju Jan

    (Banque Mondiale - Banque Mondiale - Banque Mondiale)

Abstract

This paper contributes to the literature by looking at the possible importance of the structure of the financial system—whether financial intermediation is performed through banks or markets—for macroeconomic volatility, against the backdrop of increased policy attention on strengthening growth resilience. With low income countries (LICs) being the most vulnerable to large and frequent terms of trade shocks, the paper focuses on a sample of 38 LICs over the period 1978-2012 and finds that banking sector development acts as a shock absorber, dampening the transmission of terms of trade shocks to growth volatility. Expanding the sample to 121 developing countries confirms this result, although this role of shock-absorber fades away as economies grow richer. Stock market development, by contrast, appears neither to be a shock absorber nor a shock amplifier for most economies. These findings are robust across fixed effect, System GMM and local projection estimates.

Suggested Citation

  • Kangni Kpodar & Maëlan Le Goff & Singh Raju Jan, 2018. "Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries," Post-Print hal-01907579, HAL.
    • Handle: RePEc:hal:journl:hal-01907579
    Note: View the original document on HAL open archive server: https://hal.science/hal-01907579
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    References listed on IDEAS

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    Cited by:

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    3. Martínez-Jaramillo, Serafín & Montañez-Enríquez, Ricardo & Ossandon Busch, Matias & Ramos-Francia, Manuel & Rodríguez-Martínez, Anahí & Sánchez-Martínez, Manuel, 2022. "Stress-ridden finance and growth losses: Does financial development break the link?," IWH Discussion Papers 3/2022, Halle Institute for Economic Research (IWH).
    4. Mario Holzner & Stefan Jestl & David Pichler, 2022. "Public and private pension systems and macroeconomic volatility in OECD countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(2), pages 131-168, May.
    5. Brice Kamguia & Ronald Djeunankan & Sosson Tadadjeu & Henri Njangang, 2024. "Does macroeconomic instability hamper access to electricity? Evidence from developing countries," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(2), pages 387-414, April.
    6. 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.
    7. Chima Igwe-Kalu & Barnabas Olusegun Obasaju, 2020. "Output Volatility in Nigeria: Does Financial Development Absorb Trade-Led Shocks?," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 10(2), pages 66-78.
    8. Lubomír Civín & Luboš Smutka, 2020. "Vulnerability of European Union Economies in Agro Trade," Sustainability, MDPI, vol. 12(12), pages 1-33, June.
    9. Désiré Avom & Brice Kamguia & Joseph Pasky Ngameni, 2021. "Does volatility hinder economic complexity?," Economics Bulletin, AccessEcon, vol. 41(3), pages 1187-1202.

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    More about this item

    Keywords

    Banks; stock markets; terms of trade; growth volatility;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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