ESSAYS ON MACROECONOMIC VULNERABILITY FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH

Many studies identified financial market deepening as supporting macroeconomic stability and long-term growth. However, the role of the financial sector in increasing and propagating shocks has been considered only by few studies. The aim of this thesis is to empirically assess the effects of output volatility on growth and the limits of the financial sector in generating long-term and stable growth. First, we reexamine the linkage between output volatility and economic growth, considering cross-section dependence and heterogeneity. By doing so, we use the common correlated effects mean group estimator which accounts for cross-section dependence and heterogeneity. Our study focuses on a panel of 85 developed and developing economies from 1975 to 2006. We confirm the negative relationship between output volatility and economic growth. Moreover, we show that, as cross-country interdependence increases, economies get synchronized, thus more vulnerable to common shocks. This is particularly true for advanced countries where the negative effect of macroeconomic fluctuations on growth seem to be stronger than in developing countries. Thus, the findings advocating a positive effect of volatility on growth may be spurious. Second, we address the effects of financial development on economic growth for a sample of 64 developed and developing countries from 1980 to 2010. Our analysis using traditional GMM techniques and panel smoothing transition regression model (PSTR), suggests that the benefits from financial development crucially depend on the level of economic and financial development. Below a given level of income, financial development adversely affects growth. Also excessive finance tends to deter growth and increase macroeconomic instability.