Does Financial Inclusion Amplify Output Volatility in Emerging and Developing Economies?
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Does Financial Inclusion Amplify Output Volatility in Emerging and Developing Economies? Tony Cavoli 1
& Sasidaran
Gopalan 2 & Ramkishen S. Rajan 3
# Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract This paper empirically investigates if, in what direction, and under what circumstances financial inclusion amplifies or moderates output volatility, which is a matter of concern for monetary policymakers in emerging and developing economies (EMDEs). The empirical estimation for a large panel of over 100 EMDEs spanning the period 1995 to 2013 finds a strong and persistent trade-off between higher financial inclusion and output stability. The paper also finds strong and robust evidence of non-linearity governing this relationship. Countries with high degrees of financial inclusion as well as those that are relatively lower income tend to experience a significant trade-off between financial inclusion and output stability. Further, the paper also finds that reckless financial inclusion coinciding with excessive credit growth tends to worsen output volatility. Keywords Financial inclusion . output volatility . credit growth . emerging and developing
economies . panel data JEL Classification E44 . E32 . O11
The authors appreciate the valuable feedback offered by an anonymous referee of the journal. They also sincerely thank Aizhan Sharipova for providing high-quality research assistance. The authors are also thankful for the financial support provided by the Lee Kwan Yew School of Public Policy, National University of Singapore under the “Special Project Funding Scheme. The usual disclaimer applies.
* Tony Cavoli [email protected] Sasidaran Gopalan [email protected] Ramkishen S. Rajan [email protected]
1
UniSA Business School, University of South Australia, Adelaide, Australia
2
Nanyang Business School, Nanyang Technological University (NTU), Singapore, Singapore
3
Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore, Singapore
Cavoli T. et al.
1 Introduction In a now classic paper, King and Levine (1993) show that financial development could promote economic growth via enhanced efficiency and by increasing the rate of physical capital accumulation.1 Since then, there has been a growing body of literature emphasizing the existence of a strong and positive nexus between different dimensions of financial sector development and economic growth, particularly in emerging market and developing economies (EMDEs) (See Levine 2005; Demirgüç-Kunt and Levine 2008 for reviews).2 As Barajas et al. (2013) note in their survey of this literature, the empirical literature generally finds that the contribution of financial sector development to growth is heterogeneous across regions, countries and income levels (Nili and Rastad 2007), with some findings of non-linear effects in that “too much finance” could be detrimental to economic growth (Arcand et al. 2015; Cecchetti and Kharroubi 2015; Samargandi et al. 2015). Financial sector development can be thoug
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