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

This paper contributes to the literature by looking at the possible relevance of the structure of the financial systemfinancial intermediation is performed through banks or marketsmacroeconomic volatility, against the backdrop of increased policy attention on strengthening growth resilience. With lo...

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Bibliographic Details
Published in:Policy File 2019
Main Authors: Kpodar, Kangni, Le Goff, Maelan, Singh, J Raju
Format: Report
Language:English
Subjects:
International Monetary Fund
Online Access:Request full text
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Summary:This paper contributes to the literature by looking at the possible relevance of the structure of the financial systemfinancial intermediation is performed through banks or marketsmacroeconomic 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 in poor countries, 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 consistent across a range of econometric estimators, including fixed effect, system GMM and local projection estimates.