Using cross-country panel data over the period 1996-2012, this paper examines the impact of financial development on macroeconomic volatility using GMM estimators. In contrast to the linear relationship identified in many previous studies, we present robust evidence suggesting that the effect of financial development on macroeconomic volatility is nonlinear and U-shaped. We also investigate the potential differences between developed and developing countries. The results of the paper add new evidence and shed interesting insights into the recent debate on the role of finance in macroeconomic fluctuations.

【Keywords】

Financial development, macroeconomic volatility, nonlinear relationship

Yong Ma, Senior Research Fellow of IMI, China Financial Policy Research Center, School of Finance, Renmin University of China, China.

Ke Song, Deputy Director of IMI, China Financial Policy Research Center, School of Finance, Renmin University of China, China