Macroeconomic Volatility and Financial Architecture Instability: Institutional Considerations of the Causality

Abstract

This paper investigates the role of institutions in explaining the causality relationship between macroeconomic volatility and financial architecture instability. We document that shocks and higher macroeconomic volatility weaken financial structure and determine the endogeneity of institutions. Examining the way by which the authorities act to build the DFAs under excessive volatility, we note that reactive policymaking models influence the timing and the order of innovations of the DFA institutions and have the potential to produce economically dysfunctional configurations in some time. We also indicate that human resources and other constraints linked to the capacity of public and private agents contribute to financial fragility in developing countries.Keywords: Financial architecture, Institutions, Macroeconomic volatility.