Does Financial Market Development Matter in Explaining Growth Fluctuations?

3 We wish to thank Ghazi Boulila Mohamed Lahouel, Rym Mouellehi for helpful comments and suggestions. We thank also the Laboratoire de Macroéconomie et de Croissance (LMC) for Financial assistance. Any remaining errors are the sole responsibility of the authors. 2 This paper explores the link between the level of financial development and growth volatility for a sample of 66 countries covering the period 1960 to 1999. Using traditional cross-section, instrumental variable procedure, a pooled cross-section and time-series analysis and dynamic panel techniques, we found that financial development reduces growth volatility only in the whole sample and in developed countries. However, for the case of developing countries, financial development does not exert any significant effect on growth variability and this may be explained by, First, high distortions that prevent financial markets to function in an optimal way. Second, the delay in implementing financial liberalization policies. Finally, the absence of a strict control on credit allocation activity by monetary authorities. Moreover, our results show that for developing countries where financial institutions are not strong enough to avoid or at least to absorb higher financial shocks, it is rather financial fluctuations which account for growth volatility