Financial Intermediaries Development And Economic Growth Volatility

Since the early1990s of the last century, the financial reform in China which focused on banks’ marketlization has made significant progress. The level of financial intermediaries development has been greatly improved. In the meantime, since1992, macroeconomic performance in China was confirmed to be extremely steady than that at the beginning of reform and opening up. Both the amplitude and frequency of the fluctuations of the economy are significantly slowed down. Based on the facts mentioned above, this paper focuses on the nexus between financial development and economic growth volatility.This paper summarizes the theoretical mechanisms to relate financial development and economic growth volatility, and reviews some empirical evidences from both home and abroad. After a literature review, we analyze the characteristics of economic growth volatility since the reform and opening up. Then, we provide empirical evidence for the nexus between financial intermediaries development and economic growth volatility using time series data and provincial panel data. Finally, we have proposed the policy implications inherent in the conclusion of this article.It is found that reduction in the volatility of business cycle fluctuations is notable; it also suggests that the economic growth volatility has some features like persistence, volatility clustering and regional co-movement. After that we take empirical analysis, the result of bounds testing and ARDL cointegration approach suggest that financial development helps mitigating growth volatility in the long run. Panel data analysis based on two-way fixed effects model indicates that financial intermediation development absorbs monetary shock significantly, which is a robust conclusion. The paper also finds that whether there is an inverse-U nonlinear relationship between financial intermediation development and economic growth’s fluctuating amplitude depends on the measurement of financial intermediation development.