Systemic Crises and Growth

58 Pages Posted: 25 Apr 2005

See all articles by Romain G. Rancière

Romain G. Rancière

University of Southern California

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

Multiple version iconThere are 3 versions of this paper

Date Written: April 2005

Abstract

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.

Keywords: financial constraints, growth and institutions, bailout guarantees, volatility, emerging markets

JEL Classification: F34, F36, F43, O41

Suggested Citation

Rancière, Romain G. and Tornell, Aaron and Westermann, Frank, Systemic Crises and Growth (April 2005). CESifo Working Paper Series No. 1451. Available at SSRN: https://ssrn.com/abstract=708994

Romain G. Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
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Aaron Tornell

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

Box 951477
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Los Angeles, CA 90095-1477
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National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Frank Westermann (Contact Author)

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

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Munich, 01069
Germany

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