Financial development and growth volatility revisited

This paper examines the relationship between financial development and macroeconomic growth volatility. Using data from 104 countries over the period 1980–2023 and employing endogeneity-robust estimation techniques, we find that financial intermediation, along with access, depth, and efficiency of financial institutions and markets, generally reduces growth volatility in the long run. However, this effect is non-monotonic, implying that too much finance might actually exacerbate growth volatility. Furthermore, we show that the relationship between financial development and growth volatility has weakened over time and that there is no significant association between finance and growth volatility in the short run. • Financial development has a negative long-run effect on growth volatility. • The relationship is non-monotonic, with too much finance exacerbating volatility. • The link between financial development and growth volatility has recently weakened. • Financial development has no significant short-run impact on growth volatility.