Revisiting the Link between Finance and Macroeconomic Volatility

This paper examines the impact of financial depth on macroeconomic volatility using a dynamic panel analysis for 110 advanced and developing countries. It finds that financial depth plays a significant role in dampening the volatility of output, consumption, and investment growth, but only up to a certain point. It also finds strong evidence that deeper financial systems serve as shock absorbers, mitigating the negative effects of real external shocks on macroeconomic volatility.