Financial Sector Ups and Downs and the Real Sector: Big Hindrance, Little Help

40 Pages Posted: 20 Apr 2016

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Brian Pinto


Vladyslav Sushko

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2011


This paper examines how financial expansion and contraction cycles affect the broader economy through their impact on eight real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others -- such as government, public utilities, and transportation -- also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have asymmetric effects, with the majority of real sectors adversely affected by contractions but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms two to three times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness; relative predominance of construction, manufacturing, and wholesale and retail sectors; and low international reserves. Finally, the analysis finds that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of "up by the stairs, down by the elevator dynamics."

Keywords: Economic Theory & Research, Achieving Shared Growth, Emerging Markets, Currencies and Exchange Rates, Debt Markets

Suggested Citation

Aizenman, Joshua and Pinto, Brian and Sushko, Vladyslav, Financial Sector Ups and Downs and the Real Sector: Big Hindrance, Little Help (October 1, 2011). World Bank Policy Research Working Paper No. 5860, Available at SSRN:

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Brian Pinto

Independent ( email )

Vladyslav Sushko

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

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