Boom-Bust Cycles in Middle Income Countries: Facts and Explanation

47 Pages Posted: 20 Sep 2002 Last revised: 29 Oct 2010

See all articles by Aaron Tornell

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

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Date Written: September 2002

Abstract

In this paper we characterize empirically the comovements of macro variables typically observed in middle income countries, as well as the boom-bust cycle' that has been observed during the last two decades. We find that many countries that have liberalized their financial markets, have witnessed the development of lending booms. Most of the time the boom gradually decelerates. But sometimes the boom ends in twin currency and banking crises, and is followed by a protracted credit crunch that outlives a short-lived recession. We also find that during lending booms there is a real appreciation and the nontradables (N) sector grows faster than the tradables (T) sector. Meanwhile, the opposite is true in the aftermath of crisis. We argue that these comovements are generated by the interaction of two characteristics of financing typical of middle income countries: risky currency mismatch and asymmetric financing opportunities across the N- and T-sectors.

Suggested Citation

Tornell, Aaron and Westermann, Frank, Boom-Bust Cycles in Middle Income Countries: Facts and Explanation (September 2002). NBER Working Paper No. w9219. Available at SSRN: https://ssrn.com/abstract=332263

Aaron Tornell (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Frank Westermann

University of Osnabrueck - Department of Economics ( email )

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Osnabrueck, D-49069
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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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