Finance, Growth, And Volatility

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Executive Summary

Empirical studies have not documented an unambiguous relationship between financial development and volatility of economic growth. Existing evidence of contemporaneous association is also insufficient to establish the direction of causality. This paper studies the time series relation between financial development, economic growth and growth volatility in one unified framework. Relying on a parsimonious panel VAR framework with a panel of 81 countries between 1962 and 2000, the author finds significant positive Granger causality from financial development to growth and negative Granger causality from financial development to volatility of growth.

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