Financial deepening and business cycle volatility in Korea

Abstract

This article investigates the role of financial market development on business cycle volatility in the economy of Korea, using time-series data for the period 1967 to 2010. The financial market development and business cycle volatility are measured by three different variables of financial deepening and a movingaverage SD of real GDP, respectively. We construct a long-run causality index, as suggested by Granger and Lin (1995), in the context of cointegrated systems and vector error correction model. The estimates indicate that the measures of financial deepening, related to the role of financial institutions, mitigate cyclical fluctuations in the long run, whereas the reverse impacts are rarely evidenced. However, 'the ratio of M2 to nominal GDP' as a measure of financial deepening has an intensifying effect on business cycle. Based on the findings, we can infer that financial market reforms will not decrease business cycle volatility quickly.

Does Financial Development Moderate the Effects on Growth Volatility? The Experience of Malaysia

“…Their results provided ample support for the contention that financial development shares a strong long-run relationship with growth volatility. However, their results also showed that financial development had a statistically insignificant effect on growth volatility in the short-run, a finding replicated by Hwang and Lee (2013), who conducted a similar correlation study between financial development and growth volatility in South Korea. Kunieda (2008) used unbalanced panel data for 90 countries for the years from 1971 to 2000.…”

“…It is widely acknowledged that financial development benefits the real economy by increasing productivity of savings mobility and resource allocation to the real sectors (King & Levine, 1993a), while it may also have an adverse effect on economic growth. This inverse effect occurs if some measures of financial development increase the uncertainty of the business cycle (Hwang & Lee, 2013), and induce crises. In this article, we attempt to examine the impact of financial development on growth volatility in Malaysia.…”

Determinant of Downward Auditor Switching

“…Economic growth of countries is affected by financial sector (Johansson, 2012;Kargbo, Ding, & Kabia, 2015;Yao, Wu, & Kinugasa, 2015). Financial sector mediates all parties that have interest in business process (Hwang & Lee, 2013). In dynamics of the relationship of various stakeholders in the business, there is a phenomenon of information asymmetry.…”

“…As a core component of the modern economy, finance, such as stock market, is attracting increasingly more attention and given its influence on economic growth (Baranidharan & Vanitha, 2016;Niblock, Heng, & Sloan, 2014;Otisitswe & Moffat, 2015;Yao, Wu, & Kinugasa, 2015), and an indicator of an economy financial health (Tachiwou, 2010). As intermediaries industry, financial development, includes stock market development (Kargbo, Ding, & Kabia, 2015), have effect on business cycle (Hwang & Lee, 2013) and support allocation of resources for productive opportunities (Forti, Tsang, & Peixoto, 2011). It shows that stock market is one of important sector to improve business activities.…”

Finance-Growth Volatility Nexus: Evidence from Lebanon

“…In contrast to the flood of research on the relationship between financial market development and economic growth, empirical work on the relation of macroeconomic volatility to financial development to has been relatively limited. For instance, Hwang and Lee (2013) found that financial deepening as measured by the ratio of M2 to the gross domestic product (GDP) is positively related to growth volatility, whereas Kose et al (2003) found that the ratio of M2 to GDP reduces output volatility. Beck et al (2006) found a weak evidence that financial intermediaries dampen the effect of terms of trade volatility, while Neaime (2005) found that financial openness increases Asian Economic and Financial Review growth volatility, Abdullahi and Suardi (2009) found that financial market depth reduces output volatility, and Larrain (2006) found that with more credit extended to the private sector idiosyncratic volatility is reduced by far more than systematic risk.…”