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Economic growth volatility: Is financialization a culprit?
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- 1. Universiti Malaysia Terengganu, Kuala Terengganu, Malaysia|National Bank of Pakistan, Islamabad, Pakistan
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Financial development plays a crucial role in shaping economic growth, yet it can introduce volatility. This study examines the relationship between financial development and economic growth volatility. Using panel data from 60 countries (30 developed and 30 developing) for 1981–2022, we employ panel-corrected standard errors and generalized method of moments to ensure robustness. Financial development is analyzed through financial institutions and financial markets across three dimensions: depth, access, and efficiency. Conceptually, the paper finds that the supply-leading hypothesis does not account for the economic growth volatility associated with excessive financialization. The results indicate that, at higher levels, financial development has a volatility-enhancing impact in developed countries, while in developing countries it has a volatility-reducing effect. Policymakers in developed countries should ensure that credit expansion is aligned with real-sector development. Regulators should monitor adverse effects of financial depth and ensure funds are directed toward real-sector growth, while improving access and efficiency. In a too‑much-finance scenario, economies need moderators — such as strong regulatory quality and well-defined rights for creditors and borrowers — to mitigate volatility-enhancing effects.
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