Financial sector development and growth volatility: An international study

Abstract

In this paper, I investigate the effect of financial sector development on the growth volatility by using the data of 50 countries. The empirical results show that the aggregate growth volatility declines from 1997 to 2014 in the global perspective while the advanced countries have much smaller growth volatility than the developing countries. Using the dynamic panel threshold model, I find that financial sector development significantly reduces growth volatility, especially in its lower regime. Besides, financial sector development magnifies the shock of inflation volatility towards growth volatility in its higher regime. My results reveal the importance to keep the financial sector development in one optimal level, which is beneficial to reduce aggregate fluctuations and dampen the inflation shocks.