Finance and Growth Cycles

This research examines the effect of financial development on volatility in economic growth. It demonstrates theoretically that financial development has a hump-shaped effect on volatility in economic growth. In early stages of the development of a financial sector, growth rates evolve monotonically. At the intermediate level of financial development, as the degree of credit market imperfections diminishes and as asymmetric information between borrowers and lenders is less pronounced, an economy exhibits endogenous growth cycles. However, as the financial sector matures, the volatility in the growth process dissipates and the growth rates evolve once again monotonically.