Financial Volatility, regulation and Economic Growth
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:
- 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;
- 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;
- 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;
- 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.
- 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
Agénor, P-R. "Des promesses et encore des promesses : la volatilité de l'aide et la croissance économique" Ferdi Note brève B148, mai 2016 (also in english : Promises, Promises: Aid Volatility and Economic Growth)
Agénor, P-R. (2016) "Comprendre les liens entre règlementation macroprudentielle, stabilité financière et croissance" Ferdi Note brève B147, mai 2016. (also in English : Understanding the links between Macroprudential Regulation, Financial Stability, and Growth)
Agénor, P-R "Growth and Welfare Effects of Macroprudential Regulation", CGBCR Discussion Paper Number 218, February 2016 | Download the presentation slides | Policy brief
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)
Chauvet, L., Ferry, M., Guillaumont, P., Guillaumont Jeanneney, S., Tapsoba, S. J.-A. et Wagner, L.Economic Volatility and Inequality: Do Aid and Remittances Matter? Ferdi Note brève B152, juillet 2016
Combes, L-L., Kinda, T., Ouedraogo, R., Plane, P. (2016) "Does It Always Pour When it Rains? Capital Flows and Economic Growth in Developing Countries" Ferdi Document de travail P157, juillet 2016
Combes, J-L., Haidara,A., Kinda, T., Ouedraogo, R., Plane, P. et Samba, O. (2016) "Les flux de capitaux internationaux affectent-ils la croissance économique des pays en développement ?", Ferdi Note brève B151, juillet 2016
Guérineau, S. et Léon, F. (2016) "Information sharing, credit booms, and financial stability", Ferdi Document de travail P159, juillet 2016
Neanidis, K.C. "Volatilité des flux de capitaux et croissance économique : le rôle de la réglementation macroprudentielle", Ferdi Note brève B146, avril 2016 (also in english : "Volatile Capital Flows and Economic Growth: The Role of Macro-prudential Regulation (Summary column)"
Neanidis , K.C. "Volatile Capital Flows and Economic Growth: The Role of Macro-Prudential Regulation", CGBCR Discussion Paper Number 215, November 2015 | Download the presentation slides | Policy brief
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/
We analyse the relationship between income volatility and inequality and the conditional role played by aid and remittances....
This paper contributes to the literature by looking at the possible importance of the structure of the financial system—whether...
We analyse the relationship between income volatility and inequality and the conditional role played by aid and remittances. Using a panel of 142 countries...
This paper assesses the impact of capital inflows and their composition on the real exchange rate and economic growth in...
This paper studies the extent to which alternative loan loss provisioning regimes affect the procyclicality of the financial...
This paper analyzes the impact of credit information sharing on financial stability, drawing special attention to its interactions...
Evidence for the growth impact of capital inflows remains open to question. Capital inflows can directly support economic growth by relaxing constraints...
We examine the adverse impact of macroeconomic volatility on inequality and the role that aid and remittances could play...
The global financial crisis has highlighted the vulnerability of financial systems and stressed the need for improving the...
The growth effects of financial volatility, and ways to mitigate them, have been largely absent from recent discussions about...
Empirical contributions show that there is robust statistical evidence that aid volatility tends to have an adverse effect...
Macro-prudential policies, their use, implementation and effectiveness, have been at the centre of a heated debate since...
Economies in which the extraction of a non-renewable natural resource is a significant activity pose two distinctive challenges...
This paper assesses how regional trade agreements (RTAs) impact growth volatility on a worldwide sample of 170 countries with data spanning the period...
This study discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address...
This paper reviews arguments for and against attributing an explicit financial stability objective to monetary policy. The discussion is conducted from...
This paper reviews arguments for and against attributing explicitly a financial stability objective to monetary policy. The discussion is conducted...
Conference organised by the Center for Growth and Business Cycle Research (University of Manchester), the Foundation for Studies and Research on International Development (FERDI) and the OCP Policy Center
The aim was to present and to discuss the contributions prepared for the project Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries
Samuel Guérineau presented his paper co-written with Florian Léon : "Information sharing, credit booms and financial stability in developing countries".
A workshop organised by Ferdi