Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries
IMF Working Papers, March 25, 2019
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- Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries
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Bibliographic details
- Authors: Kangni R Kpodar, Maelan Le Goff, Raju J Singh
- Published: March 25, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498303569.001
Overview and scope
- Authors: Kangni R Kpodar, Maelan Le Goff, Raju J Singh
- Publication date: March 25, 2019
- Series: Working Paper No. 2019/068; Issue: 068; Pages: 35
- DOI: https://doi.org/10.5089/9781498303569.001
- ISBN: 9781498303569
- ISSN: 1018-5941
- Sample and period:
- Primary sample: 38 low-income countries (LICs) over the period 1978-2012
- Expanded sample: 121 developing countries
Key findings
- Banking sector development acts as a shock-absorber in poor countries:
- Dampens the transmission of terms of trade shocks to growth volatility in the 38 LIC sample (1978-2012).
- Role of banking-sector shock absorption changes with income:
- Expanding to 121 developing countries confirms the shock-absorber result, although this role "fades away as economies grow richer."
- Stock market development effects:
- Stock market development appears neither to be a shock-absorber nor a shock-amplifier for most economies.
- Robustness:
- Findings are consistent across a range of econometric estimators, including fixed effect, system GMM and local projection estimates.
Policy-relevant implications
- Financial structure matters for resilience to external shocks in LICs:
- Strengthening banking-sector development in LICs could dampen the impact of terms of trade shocks on growth volatility.
- Consideration of country income level:
- The buffering role of bank development is context-dependent and weakens as countries become richer; policy design should account for the changing role of financial intermediation across development stages.
- Financial market development sequencing:
- Given that stock market development is neither clearly stabilizing nor destabilizing, policymakers should prioritize bank intermediation capacity when aiming to reduce growth volatility from terms of trade shocks in low-income settings.
Methodology and analytic approach
- Empirical strategy uses panel data on LICs and a broader set of developing countries.
- Econometric estimators employed include:
- Fixed effect estimates
- System GMM estimates
- Local projection estimates
Subjects and keywords
- Subjects: 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
Source: IMF Working Paper "Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries", Kangni R Kpodar, Maelan Le Goff, Raju J Singh, March 25, 2019, Working Paper No. 2019/068.
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