Financial volatility, macroprudential regulation and economic growth in low-income countries

Interactions between financial volatility, prudential regulation, and economic growth, in the context of Sub-Saharan Africa.

Complete • February 01, 2017

The global financial crisis of 2007-09 has highlighted weaknesses in macroeconomic and regulatory policies and market failures that contributed to a build up of systemic risks. At the international level, reform proposals have led to the adoption, in November 2010, of the new Basel III banking standards.

However, much of the debate has focused on the implications of financial volatility for short-term economic stability, rather than their long-run effects. Although this emphasis is important—many countries, especially the poorest ones, have very low resilience and capacity to cope with adverse short-term shocks—it is also problematic because one lesson of financial crises is that they often have large adverse, long-term effects on financial development and economic growth. From that perspective, the global financial crisis raises also 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, due to their effect on risk taking? Very few contributions have attempted to address these issues in a systematic manner.

Project objectives

The purpose of the project was to study, both theoretically and empirically, interactions between financial volatility, prudential regulation, and economic growth, in the context of Sub-Saharan Africa and to draw broad policy lessons for the design of macroprudential rules. Within Sub-Saharan Africa, the project focused particularly on Francophone countries; for the issues at stake, it was expected that the nature of the monetary and financial arrangements in these countries could have important implications. Because both low- and middle-income countries face similar weaknesses in the area of prudential supervision, several aspects of the research have proved to be useful for both types of countries.

The project achieved these four objectives:

  1. It contributed to the existing analytical literature in areas related to the links between financial volatility and economic growth, and how the macroprudential regulatory rules integrated in Basel III (especially those deemed appropriate for the institutional context of developing countries, such as liquidity requirements and leverage ratios) can help to mitigate the adverse effects of financial volatility on growth;
  2. It provided new evidence on the impact of financial volatility and its determinants (both domestic and external) on economic growth, with particular attention to the case of the low-income countries in Sub-Saharan Africa;
  3. It developed case studies for Francophone Sub-Saharan African countries focusing on the links between financial volatility (broadly defined to include volatility of remittances and capital flows, both public and private), macroprudential regulation, and growth, to account for their specific monetary and financial regime, and complement case studies developed in parallel of ESRC-DFID projects, thereby allowing a broader comparative analysis of these issues for the region;
  4. It identified the practical policy implications of the analytical and empirical research and discussed the extent to which they differ from the “consensus view” in areas related to the benefits of financial liberalization and the effectiveness of macroprudential policy (especially those considered under Basel III) in promoting growth.

Dissemination involved presentations to both academic and policy-oriented audiences, including national and international institutions involved in development. A particular effort was made to promote dissemination in Sub-Saharan Africa, where policymakers were able to benefit directly from the lessons drawn from the project.


  • Université de Manchester (ESRC-DFID project)