Description: The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth : Evidence for the Eastern Caribbean

The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth : Evidence for the Eastern Caribbean

This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980–2010, the paper finds that: (i)...

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Bibliographic Details
Main Authors:	Brüeckner, Markus, Carneiro, Francisco
Language:	English en_US
Published:	World Bank, Washington, DC 2015
Subjects:	GROWTH RATES OUTPUT VOLATILITY MONETARY POLICY CAPITAL MARKETS DEPOSIT FINANCIAL SERVICES CAPITA INCOME ECONOMIC GROWTH SMALL ECONOMIES EFFECTS OF VOLATILITY ECONOMIC GROWTH RATES AMERICAN ECONOMIC REVIEW INTERNATIONAL COUNTRY RISK GUIDE MONETARY ECONOMICS EFFECT OF VOLATILITY ON GROWTH FLOW OF FUNDS COUNTRY FIXED EFFECTS INCOME INTEREST ECONOMIC VOLATILITY GOVERNMENT SPENDING EXCHANGE GROWTH VOLATILITY LIQUIDITY DEVELOPING COUNTRIES POLITICAL ECONOMY DEVELOPING ECONOMIES FISCAL POLICY LIQUIDITY RISK WORLD DEVELOPMENT INDICATORS CAUSAL EFFECT OF VOLATILITY ON GROWTH INTERACTION TERMS PRICE TAX FINANCIAL INTEGRATION LONG-TERM INVESTMENT DEVELOPED COUNTRIES LINK BETWEEN VOLATILITY BANK LENDING ECONOMIC ACTIVITY STANDARD DEVIATION FISCAL POLICIES GLOBAL ECONOMY PER CAPITA INCOME TRADE SHOCKS MIDDLE INCOME GROWTH EFFECT PRICE VOLATILITY CRISIS POLITICAL POWER INCREASE IN VOLATILITY STANDARD ERRORS NATURAL DISASTERS EMERGING MARKET LOW- INCOME COUNTRIES DEBT PRIVATE INVESTMENT FISCAL CONSOLIDATION DEPOSIT INSURANCE OPEN ECONOMY BUSINESS CYCLE INCOME LEVELS REVIEW OF ECONOMICS FLUCTUATIONS RECESSIONS EXOGENOUS VOLATILITY GROSS DOMESTIC PRODUCT COMMODITY PRICE TAX BASE VARIABILITY TAXES GROWTH EFFECTS EMERGING MARKETS POLICY UNCERTAINTY CREDIT CONSTRAINTS ECONOMIC PERFORMANCE INTERNATIONAL TRADE VOLATILITY COUNTRY RISK CREDIT CONSTRAINT FINANCIAL CRISIS FUTURE MACROECONOMICS OUTPUT GAP INCOME DISTRIBUTION CAPITAL FLOWS PRIVATE SECTOR SHARES FINANCIAL SECTOR STABILITY REAL EXCHANGE RATE RAPID EXPANSION EXCHANGE RATE REGIME UNDERDEVELOPMENT CAPITA GROWTH SECURITIES OUTPUT DEMOCRACIES INSTRUMENTAL VARIABLES EXPOSURE INSURANCE BUSINESS CYCLES ECONOMIC DEVELOPMENT CYCLICAL FISCAL POLICY INTERNATIONAL BEST PRACTICES TRADE PER CAPITA INCOME LEVELS INTERNATIONAL MONETARY FUND FINANCIAL DEVELOPMENT FINANCIAL MARKET GROWTH RATE INVESTMENT MACROECONOMIC VOLATILITY DOMESTIC CREDIT SHARE GROWTH PERFORMANCE BALANCE SHEETS FINANCIAL MARKETS IMPACT OF VOLATILITY BANKING INTERACTION TERM EXTERNAL SHOCKS LESS DEVELOPED ECONOMIES EFFECT OF VOLATILITY MACROECONOMIC POLICIES EXCHANGE RATE ECONOMIC SHOCKS FINANCIAL SECTOR OPEN ECONOMIES COMMODITY ADVERSE EFFECTS GROWTH
Online Access:	http://documents.worldbank.org/curated/en/2015/12/25517482/effects-volatility-fiscal-policy-cyclicality-financial-development-growth-evidence-eastern-caribbean http://hdl.handle.net/10986/23470

Description
Summary:	This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980–2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.

The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth : Evidence for the Eastern Caribbean

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