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

Abstract

This paper contributes to the literature by looking at the possible relevance 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 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.

Public and private pension systems and macroeconomic volatility in OECD countries

“…In this respect, we hypothesise to find a negative effect on volatility. Dabla-Norris and Srivisal 2013and Kpodar et al (2019) found volatility-dampening effects for the corresponding indicator.…”

“…The results for real GDP per capita, gross fixed-capital formation and private final consumption are consistent with those already presented in Section 4. Kpodar and Imam (2016) and Kpodar et al (2019) introduced an alternative approach to measure economic volatility. Their approach relied on the assumption that the long-term component of the real GDP per capita follows an AR (1)-process with a time-trend.…”

“…In order to control for economic development, we include the logarithm of the beginning-of-period GDP per capita. Kpodar et al (2018) argued that economies may show a higher sectoral concentration in early stages of development, which can be linked to a higher per capita growth volatility. Since the pension system might be correlated with other characteristics of the public sector, we also include a control variable that captures the general features of the social safety net of an economy (i.e.…”

“…Di Giovanni & Levchenko, 2009;Karras, 2006;Kpodar & Imam, 2016), financial integration (e.g. Dabla-Norris & Srivisal, 2013;Kose et al, 2003;Kpodar et al, 2018) and labour market institutions (e.g. Rumler & Scharler, 2011) has received considerable attention, the link between different pension schemes and macroeconomic fluctuations remains largely unexplored.…”

Productive Capacities, Economic Growth and Economic Growth Volatility in Developing Countries: Does Structural Economic Vulnerability Matter?

“…The literature has now well established that the proneness of developing countries to shocks 2 , and the subsequent size and frequency of these shocks (e.g., Aguiar and Gopinath, 2007;Cariolle et al 2016;Guillaumont, 2009;Goujon and Guillaumont, 2016;Essers, 2013) reduce their economic growth (e.g., Almansour et al, 2015;Azomahou et al, 2015;Bacha, 1986;Blecker, 2009;Dabla-Norris and Gündüz, 2014;Guillaumont and Wagner, 2012) and contribute to strong fluctuations of economic growth (e.g., Barrot et al 2018;Kim et al, 2020;Letendre and Obaid, 2020;Kose and Riezman, 2001;Kpodar et al, 2018;Raddatz, 2007;Rasaki and Malikane, 2015).…”