Growth and Volatility in Developing Countries: The Role of Credits and Fiscal Policy

Abstract

The purpose of this paper is to analyze the role of credits, R&D spending, and fiscal policy in contributing to reduce volatility, and enhance the adjustment capacity to shocks. The foregoing is especially relevant for emerging countries like Chile, which are frequently threatened by external shocks. In addition, credit market distortions are more frequent in these economies. Using an empirical analysis for a panel data of 72 countries between 1950 and 2004, we find positive correlations between credits, R&D spending, fiscal policy, and growth. On the other hand, we find negative correlations between these variables and volatility. Testing different types of models we find very robust results, suggesting that countries with more developed domestic financial markets are in better conditions to recover growth after a shock. The same is true when countries apply fiscal policies that guarantee “fiscal discipline”.