Financial Sector Ups and Downs and the Real Sector in the Open Economy: Up by the Stairs, Down by the Parachute

39 Pages Posted: 16 May 2013

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Brian Pinto

Independent

Vladyslav Sushko

Bank for International Settlements (BIS)

Date Written: April 1, 2013

Abstract

We examine how financial expansion and contraction cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly 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 through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.

Keywords: financial cycles, financial and trade openness, real transmission of financial shocks, foreign exchange reserves

JEL Classification: F15, F31, F36, F4

Suggested Citation

Aizenman, Joshua and Pinto, Brian and Sushko, Vladyslav, Financial Sector Ups and Downs and the Real Sector in the Open Economy: Up by the Stairs, Down by the Parachute (April 1, 2013). BIS Working Paper No. 411, Available at SSRN: https://ssrn.com/abstract=2265823

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
Switzerland

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