Islam, Roumeen2016-07-072016-07-072016-06https://hdl.handle.net/10986/24640This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth. It also examines the impact of credit on the composition of growth. The findings show that financial development smooths growth in gross domestic product and consumption per capita, but only up to a point. At high levels of credit, further credit is positively associated with volatility even after controlling for the quality of institutions and periods of financial crises. In large financial systems, finance may not help individuals smooth consumption volatility. The threshold at which finance's effect may be volatility enhancing may be lower than previously thought. In terms of the impact on growth, total credit (and credit to firms) has a nonlinear relationship, with rising credit supporting higher growth up to a point, beyond which the additional impact of finance on growth is negative. This can be explained by finance flowing into less productive activities (or drawing other resources into less productive activities). In addition, household credit is negatively related to manufacturing sector growth, although credit to firms has a positive relationship to manufacturing growth. This may be explained by the fact that much of household credit is used to finance the consumption (including imports) of goods and services broadly (not just manufacturing sector goods) or investment in housing.en-USCC BY 3.0 IGOENTERPRISE CREDITFINANCIAL SYSTEM DEVELOPMENTGROWTH RATESOUTPUT VOLATILITYCREDIT MARKETSMONETARY POLICYDEPOSITBORROWERCAPITA INCOMEFINANCIAL INNOVATIONECONOMIC GROWTHPEOPLEAMERICAN ECONOMIC REVIEWCAPITAL ACCUMULATIONMONETARY ECONOMICSMARKET DEVELOPMENTSGLOBAL MARKETSINCOMEINTERESTENROLLMENTFINANCIAL LIBERALIZATIONSPRIVATE CREDITSTOCK MARKETFINANCIAL SECTOR POLICIESINCOME GROUPGROWTH VOLATILITYEQUITY MARKETPOLITICAL ECONOMYMORTGAGEWELFAREMORTGAGE LENDINGASYMMETRIC INFORMATIONBORROWERSTRADE OPENNESSSUBSIDYCORRUPTIONWEALTHSAVINGINFLATIONINTERNATIONAL BANKFINANCIAL CREDITFINANCIAL FRAGILITYLEVELS OF CREDITEXTERNAL FINANCEMACROECONOMIC STABILITYSTANDARD DEVIATIONSAVINGSMORTGAGESPER CAPITA INCOMEHOUSING FINANCEMARKET DEVELOPMENTMORAL HAZARDADVANCED ECONOMIESHIGHER VOLATILITYRISKY BORROWERSCURRENT ACCOUNTCRISISFINANCIAL INSTITUTIONSDEBTCAPITAL MARKETFINANCIAL CRISESHIGH INCOMEFINANCIAL FLOWSBUSINESS CYCLEINCOME LEVELSMACROECONOMIC FLUCTUATIONSFINANCIAL REFORMSBANKERSFLUCTUATIONSBANK CREDITGROSS DOMESTIC PRODUCTFINANCIAL SYSTEMFINANCELIBERALIZATIONBANKSEXPENDITUREMORTGAGE CREDITEQUITYHUMAN CAPITALFEDERAL RESERVECREDIT CONSTRAINTSECONOMIC PERFORMANCECAPITALVOLATILITYBANKING CRISISLONG-RUN GROWTHBANKFOREIGN DIRECT INVESTMENTSYSTEMIC BANKING CRISESCREDITMACROECONOMICSLEVEL OF DEVELOPMENTINCOME DISTRIBUTIONHOUSEHOLDEXPENDITURESENTERPRISECAPITAL FLOWSPROPERTIESPRIVATE SECTORREAL EXCHANGE RATEUNDERDEVELOPMENTCAPITA GROWTHGLOBAL FINANCIAL MARKETMONETARY SHOCKSGROWTH RELATIONSHIPACCESS TO CREDITECONOMIC DEVELOPMENTFINANCIAL LIBERALIZATIONINTERNATIONAL MONETARY FUNDFINANCIAL DEVELOPMENTFINANCIAL MARKETMACROECONOMIC VOLATILITYINVESTMENTBARTERFINANCIAL INTERMEDIATIONGROWTH REGRESSIONSFINANCIAL INTERMEDIARIESCREDIT EXTENSIONHOUSEHOLDSCOLLATERALFINANCIAL MARKETSFINANCIAL ASSETSRATE OF GROWTHFINANCIAL INTERMEDIARYEXTERNAL SHOCKSINVESTMENTSBORROWINGBANKING SUPERVISIONEXCHANGE RATERISK AVERSIONENROLMENT RATEBANKING CRISESFINANCIAL SYSTEMSCAPITAL ACCOUNTFINANCIAL SECTOR DEVELOPMENTFINANCIAL DEPTHINEQUALITYGROWTHFinancial Systems, Growth, and VolatilityWorking PaperWorld BankSearching for the Perfect Fit10.1596/1813-9450-7723