Financial Volatility, regulation and Economic Growth

Interactions between financial volatility, prudential regulation, and economic growth, in the context of Sub-Saharan Africa.
Financial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries

The global financial crisis of 2007-09 has highlighted weaknesses in macroeconomic and regulatory policies and market failures that contributed to a build up of systemic risks. At the international level, reform proposals have led to the adoption, in November 2010, of the new Basel III banking standards.

However, much of the debate has focused on the implications of financial volatility for short-term economic stability, rather than their long-run effects. Although this emphasis is important—many countries, especially the poorest ones, have very low resilience and capacity to cope with adverse short-term shocks—it is also problematic because one lesson of financial crises is that they often have large adverse, long-term effects on financial development and economic growth. From that perspective, the global financial crisis raises also some important issues. How does financial volatility affect long-run growth? Can macroprudential rules designed to reduce the procyclicality of financial systems be detrimental to long-run growth, due to their effect on risk taking? Very few contributions have attempted to address these issues in a systematic manner.

Accordingly, the purpose of the project is to study, both theoretically and empirically, interactions between financial volatility, prudential regulation, and economic growth, in the context of Sub-Saharan Africa and to draw broad policy lessons for the design of macroprudential rules. Within Sub-Saharan Africa, the project focuses particularly on Francophone countries; for the issues at stake, it is expected that the nature of the monetary and financial arrangements in these countries could have important implications. Because both low- and middle-income countries face similar weaknesses in the area of prudential supervision, several aspects of the research is proving useful for both types of countries.

Specifically, the project has four objectives:

  1. Contribute to the existing analytical literature in areas related to the links between financial volatility and economic growth, and how the macroprudential regulatory rules integrated in Basel III (especially those deemed appropriate for the institutional context of developing countries, such as liquidity requirements and leverage ratios) can help to mitigate the adverse effects of financial volatility on growth;
  2. Provide new evidence on the impact of financial volatility and its determinants (both domestic and external) on economic growth, with particular attention to the case of the low-income countries in Sub-Saharan Africa;
  3. Develop case studies for Francophone Sub-Saharan African countries focusing on the links between financial volatility (broadly defined to include volatility of remittances and capital flows, both public and private), macroprudential regulation, and growth, to account for their specific monetary and financial regime, and complement case studies being developed in parallel ESRC-DFID projects, thereby allowing a broader comparative analysis of these issues for the region;
  4. Identify the practical policy implications of the analytical and empirical research and discuss the extent to which they differ from the “consensus view” in areas related to the benefits of financial liberalization and the effectiveness of macroprudential policy (especially those considered under Basel III) in promoting growth.

The project began in September 2014 and is scheduled for completion in February 2017. Dissemination involves presentations to both academic and policy-oriented audiences, including national and international institutions involved in development. A particular effort is under way to promote dissemination in Sub-Saharan Africa, where policymakers are likely to benefit directly from the lessons drawn from the project.

Team

  • Pierre-Richard Agénor, University of Manchester and CGBCR (Principal Investigator)
  • Lisa Chauvet, IRD and FERDI
  • Jean-Louis Combes, Auvergne University and CERDI
  • Adama Diaw, University of Saint Louis, Senegal
  • Issa Faye, African Development Bank
  • Marin Ferry, Université Paris-Dauphine
  • Michael Goujon, Auvergne University and CERDI
  • Samuel Guérineau, Auvergne University and CERDI
  • Patrick Guillaumont, FERDI
  • Sylviane Guillaumont Jeanneney, Auvergne University and CERDI
  • Tidiane Kinda, International Monetary Fund
  • Florian Léon, Université de Luxembourg, CREA
  • Ousmane S. Mamadou, Central Bank of Western African States
  • Kyriakos C. Neanidis, University of Manchester and CGBCR
  • Patrick Plane, Auvergne University and CERDI
  • Jules S. Tapsoba, International Monetary Fund
  • Laurent Wagner, Ferdi
     

Publications on the issue

  • Chauvet, L., Ferry, M., Guillaumont, P., Guillaumont Jeanneney, S. , Tapsoba, S. J-A., and Wagner, L. (2016) "Volatility Widens Inequality. Could Aid and Remittances Help?" Ferdi Working paper  P158, juillet 2016 (revised version : April 2017)

Contributions of the project also on the website of Manchester : http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/cgbcr/esrc-dfid-project/contributions-of-the-project/

 

Volatility widens inequality. Could aid and remittances help?

Lisa CHAUVET, Marin FERRY, Patrick GUILLAUMONT, Sylviane GUILLAUMONT JEANNENEY, Sampawende J.-A. TAPSOBA, Laurent WAGNER

We analyse the relationship between income volatility and inequality and the conditional role played by aid and remittances....

Volatility Widens Inequality. Could Aid and Remittances Help?

Lisa CHAUVET, Marin FERRY, Patrick GUILLAUMONT, Sylviane GUILLAUMONT JEANNENEY, Sampawende J.-A. TAPSOBA, Laurent WAGNER P158,

We analyse the relationship between income volatility and inequality and the conditional role played by aid and remittances. Using a panel of 142 countries...

Does External Financing drive Growth?

Jean-Louis COMBES, Aminata HAIDARA, Tidiane KINDA, Rasmané OUEDRAOGO, Patrick PLANE, Ousmane SAMBA MAMADOU B151,

Evidence for the growth impact of capital inflows remains open to question. Capital inflows can directly support economic growth by relaxing constraints...

, Paris

Séminar organised by COMOZOF and Ferdi

Samuel Guérineau presented his paper co-written with Florian Léon : "Information sharing, credit booms and financial stability in developing countries".