Financial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries (2014-2017)

  • Agenor, Pierre-Richard (PI)
  • Neanidis, Kyriakos (CoI)
  • Chauvet, Lisa (CoI)
  • Combes, Jean-Louis (CoI)
  • Diaw, Adama (CoI)
  • Faye, Issa (CoI)
  • Ferry, Marin (CoI)
  • Goujon, Michael (CoI)
  • Guérineau, Samuel (CoI)
  • Guillaumont, Patrick (CoI)
  • Jeanneney, Sylviane Guillaumont (CoI)
  • Kinda, Tidiane (CoI)
  • Léon, Florian (CoI)
  • Mamadou, Ousmane S. (CoI)
  • Plane, Patrick (CoI)
  • Tapsoba, Jules S. (CoI)
  • Wagner, Laurent (CoI)

Project Details


The aim of the project was to study interactions between financial volatility, macroprudential regulation, and economic growth, in the context of low-income developing countries. The project tackled 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.

The lessons from these contributions (in all, six theoretical and econometric papers, and two country case studies) were summarised in three policy briefs, which were circulated to a wider, non-academic audience.

In its two theoretical contributions, the project studied (i) how "robust" prudential rules are, in a weak institutional environment, in their ability to mitigate financial volatility, taking into account their impact on borrowing costs, private capital accumulation, and growth, and (ii) the channels through which the lack of predictability in project aid disbursements may affect the capacity of recipient governments to formulate medium-term spending plans to spur growth. Both contributions were based on stochastic endogenous growth models with financial intermediation and credit market imperfections.

In its four empirical contributions, the project dealt with (i) the impact of financial regulation on financial volatility and its subsequent role in promoting economic growth, by mitigating the degree of volatility, (ii) the impact of aid and its volatility, along with that of remittances, on growth and poverty, (iii) the role of capital movements on both the level and the instability of the real exchange rate, as well as the implications of these movements for economic growth, and (iv) the impact of information sharing (credit registries and credit bureaus) on the structure of credit in Sub-Saharan Africa, a region where financial development is still weak. All empirical studies used state-of-the-art dynamic panel data estimation techniques that address issues of endogeneity and reverse causality, prominent in this literature. The studies also made use of the largest possible set of countries and years, with particular attention to the sources of information regarding the regulatory and supervisory practices across banking systems.

The project developed two case studies, both of which focused on French-speaking Sub-Saharan Africa. The purpose of the first study was to assess the relevance, the easiness to implement, and the expected effectiveness of a macroprudential framework for the WAEMU region, while the second study was related to the second empirical component of the project where four cases were identified under the condition that the aid (or remittances) to GDP ratio is (i) counter-cyclical and destabilizing, (ii) counter-cyclical and stabilizing, (iii) pro-cyclical and destabilizing, and (iv) procyclical and stabilizing.

The material developed in the above-cited contributions served as a basis for the preparation of three policy briefs, which drew together the implications of (i) the various papers for the type of macroprudential tools that are appropriate for promoting growth in Sub-Saharan Africa, (ii) the analysis for the speed, and nature, of international financial integration for Sub-Saharan African countries, and (iii) the second case study.

Dissemination involved presentations to both academic and policy-oriented audiences, including national and international institutions involved in development. Two major conferences (one in France, the other in Senegal) were organized during the course of the project. A particular effort was made for dissemination in Francophone Sub-Saharan Africa, where policymakers were likely to benefit directly from the lessons drawn from the project.

Funded by the DFID ESRC Growth Research Programme


Eight project contributions were discussed in a project blog (retired).

We began with the contribution of Dr. Kyriakos Neanidis, Volatile Capital Flows and Economic Growth: The Role of MacroPrudential Regulation, which was then followed by five additional contributions.

These included the two theoretical contributions of Professor Pierre-Richard Agénor, Growth and Welfare Effects of MacroPrudential Regulation, and Aid Volatility, Human Capital, and Growth.

Three empirical contributions were also released. These were: (i) the empirical contribution by Combes et al. (2016), Does It Pour When it Rains? Capital Flows and Economic Growth in Developing Countries; (ii) the study by Dr. Samuel Guérineau and Dr. Florian Léon on Information sharing, credit booms, and financial stability; and (iii) the empirical analysis of aid-remittances-inequality nexus by Chauvet et al. (2016), Economic Volatility and Inequality: Do Aid and Remittances Matter?

There were also two case studies. These were: (i) Macroprudential Policies in WAEMU Countries, by Guérineau et al. (2016); and (ii) When is aid destabilizing? Analysing profiles of aid flows in four low income countries, by Gabin et al. (2017).
Short titleR:HSE HSE: ESRC DFID 2013
Effective start/end date1/07/1431/12/16

UN Sustainable Development Goals

In 2015, UN member states agreed to 17 global Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure prosperity for all. This project contributes towards the following SDG(s):

  • SDG 8 - Decent Work and Economic Growth


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