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

By Kangni R Kpodar, Maelan Le Goff, Raju J Singh

March 25, 2019

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Format: Chicago

Kangni R Kpodar, Maelan Le Goff, and Raju J Singh. Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Commercial banks, Credit, Financial institutions, Financial markets, Financial sector development, International trade, Money, Stock markets, Terms of trade

Keywords: Banks, Commercial banks, Credit, Financial sector development, Global, Growth volatility, Shocks to growth volatility, Standard deviation, Stock markets, Terms of trade, Terms of trade fluctuation, Terms of trade shock, Terms of trade shocks, Terms of trade stock, Terms of trade volatility, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/068
Stock No:

WPIEA2019068
ISBN:

9781498303569
ISSN:

1018-5941

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