Financial Systems, Growth, and Volatility : Searching for the Perfect Fit
This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth. It also examines the impact of credi...
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| Language: | English en_US |
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World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/06/26511057/financial-systems-growth-volatility-searching-perfect-fit http://hdl.handle.net/10986/24640 |
| Summary: | This paper builds on recent research
examining the impact of finance on growth, looking at the
effect of the financial system on volatility in gross
domestic product per capita and consumption per capita
growth. It also examines the impact of credit on the
composition of growth. The findings show that financial
development smooths growth in gross domestic product and
consumption per capita, but only up to a point. At high
levels of credit, further credit is positively associated
with volatility even after controlling for the quality of
institutions and periods of financial crises. In large
financial systems, finance may not help individuals smooth
consumption volatility. The threshold at which
finance's effect may be volatility enhancing may be
lower than previously thought. In terms of the impact on
growth, total credit (and credit to firms) has a nonlinear
relationship, with rising credit supporting higher growth up
to a point, beyond which the additional impact of finance on
growth is negative. This can be explained by finance flowing
into less productive activities (or drawing other resources
into less productive activities). In addition, household
credit is negatively related to manufacturing sector growth,
although credit to firms has a positive relationship to
manufacturing growth. This may be explained by the fact that
much of household credit is used to finance the consumption
(including imports) of goods and services broadly (not just
manufacturing sector goods) or investment in housing. |
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