Financial Development and Output Volatility Nexus: The Role of Financial Sector Instability
Abstract
This research study explores the influence of financial sector development on output volatility. Particularly, the role of financial sector instability is modeled to provide a better understating of financial sector development and output volatility nexus. The empirical analysis is based on cross-sectional panel datasets for 180 countries from 1971 through 2020. In addition to Random and Fixed Effects models, the 2-SLS and GMM techniques were used for empirical analysis. Country analyses produce mixed results but show a considerable beneficial result. The results suggest that financial sector volatility increases output volatility. While financial development, on the other hand, is critical in protecting output from instability. Trade openness and inflation have also been controlled for their impact on output volatility. Trade openness, like financial stability, decreases production volatility. Inflation, as a monetary phenomenon, tends to amplify output volatility.
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Copyright (c) 2022 Anum Shoaib Abbasi, Muhammad Tariq Majeed, Huma Arshad
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