Financial volatility, macroprudential regulation and economic growth in Low-Income Countries

Professor Pierre-Richard Agenor, The University of Manchester

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This project studied interactions between financial volatility, macroprudential regulation, and economic growth, in the context of low-income developing countries.

The overall objective was to contribute to the economic growth progress of Sub-Saharan Africa by drawing policy lessons for the design of macroprudential rules aimed at mitigating the impact of financial volatility on economic growth. Although much of the debate has focused on the implications of financial volatility for short-term economic stability, the emphasis of the research is on the long-term effects of such volatility.

From that perspective, the global financial crisis raises some important issues;

  • How does financial volatility affect long-run growth?
  • Can macroprudential rules designed to reduce the procyclicality of financial systems be detrimental to long-run growth?
  • Is there a need to revisit the pace of domestic financial liberalisation?

These issues are particularly important for the poorest countries, given the need to maintain high growth rates to reduce poverty and promote human development.

The project aimed to tackle these issues both analytically and empirically through the construction of theoretical macroeconomic models, the application of econometric techniques, and the preparation of country case studies, with the aim of drawing broad policy lessons for the design of macroprudential rules.