FINANCIAL DEVELOPMENT, MACROECONOMIC VOLATILITY, AND ECONOMIC GROWTH

Abstract

The  main  objective  of  this  study  is  to  empirically  evaluate  the  impact  of  financial  development  upon macroeconomic volatility, economic growth and upon the relationship between macroeconomic volatility and economic growth.The panel dataset used in this study contains observations for 78 countries worldwide during the period 1960-1995. Most of the data sources used are standard and widely used in comparable empirical studies. There are four different relations that are estimated with the panel dataset: -the importance of a better-quality financial system for overall (average) economic growth (1); -the effect of (aggregate) growth volatility upon mean growth rate (2); - the extent to which a more developed financial sector manages to dampen aggregate shocks, and thereby reduce growth volatility (3), and; -the power of financial intermediaries and stock markets to affect (change) the relationship between mean growth and volatility (4).The paper is organized as follows: the first section is an introduction to the research topic, while the second section gives an overview of some theoretical and empirical findings in four different, though interrelated, strands of the literature. Section three presents the dataset used and the empirical strategy pursued. The mainfindings are presented in section four. Finally, section five concludes.