Systemic Crises and Growth
International Monetary Fund (IMF)
University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) - Ifo Institute for Economic Research
UPF Economics and Business Working Paper 854
In this paper, we document the fact that countries that have experienced occasional financial crises have on average grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where weak institutions lead to severe financial constraints and low growth. Financial liberalization policies that facilitate risk-taking increase leverage and investment. This leads to higher growth, but also to a greater incidence of crises. Conditions are established under which the costs of crises are outweighed by the benefits of higher growth.
Number of Pages in PDF File: 49
Keywords: Financial constraints, growth and institutions, bailout guarantees, volatility, emerging markets
JEL Classification: F34, F36, F43, O41working papers series
Date posted: November 30, 2005
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