Financial development and long-run volatility trends

Pengfei Wang, Yi Wen and Zhiwei Xu ()

No 2013-003, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Countries with more developed financial markets tend to have significantly lower aggregate volatility. This relationship is also highly non-linear starting from a low level of financial development the reduction in aggregate volatility is far more significant with respect to financial deepening than when the financial market is more developed. We build a fully-edged heterogeneous-agent model with an endogenous financial market of private credit and debt to rationalize these stylized facts. We show how financial development that promotes better credit allocations under more relaxed borrowing constraints can reduce the impact of non-financial shocks (such as TFP shocks, government spending shocks, preference shocks) on aggregate output and investment, and why this volatility-reducing effect diminishes with continuing financial liberalizations. Our simple model also sheds light on a number of other important issues, such as the \"Great Moderation\" and the simultaneously rising trends of dispersions in sales growth and stock returns for publicly traded firms.

Keywords: Financial Development; Firm Dynamics; private debts; Volatility Trends; Great Moderation; Lumpy Investment (search for similar items in EconPapers)
JEL-codes: D21 D58 E22 E32 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://research.stlouisfed.org/wp/2013/2013-003.pdf https://doi.org/10.20955/wp.2013.003 (application/pdf)
https://doi.org/10.20955/wp.2013.003 (text/html)

Related works:
Journal Article: Financial Development and Long-Run Volatility Trends (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2013-003

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2013.003

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Anna Oates ().