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Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth

Author

Listed:
  • Romain Rancière

    (International Monetary Fund (IMF), CEPR - Center for Economic Policy Research - CEPR, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Aaron Tornell

    (UCLA - University of California [Los Angeles] - UC - University of California)

Abstract

Financial liberalization increases growth, but leads to more crises and costly bailouts. We present a two-sector model in which liberalization, by allowing debt-denomination mismatch, relaxes borrowing limits in the financially constrained sector, but endogenously generates crisis risk. When regulation restricts external financing to standard debt, liberalization preserves financial discipline and may increase allocative efficiency, growth, and consumption possibilities. By contrast, under unfettered liberalization that also allows uncollateralized option-like liabilities, discipline breaks down, and efficiency falls. The model yields a testable gains-from-liberalization condition, which holds in emerging markets. It also helps rationalize the contrasting experience of emerging markets and the recent US housing crisis.

Suggested Citation

  • Romain Rancière & Aaron Tornell, 2016. "Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth," PSE-Ecole d'économie de Paris (Postprint) halshs-01314278, HAL.
    • Handle: RePEc:hal:pseptp:halshs-01314278
    DOI: 10.1257/mac.20130190
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    Cited by:

    1. Loayza,Norman V. & Ouazad,Amine & Ranciere,Romain, 2017. "Financial development, growth, and crisis: is there a trade-off ?," Policy Research Working Paper Series 8237, The World Bank.
    2. Thomas Grjebine & Fabien Tripier, 2016. "Finance and Growth: From the Business Cycle to the Long Run," Working Papers 2016-28, CEPII research center.
    3. Juliana Salomao & Liliana Varela, 2022. "Exchange Rate Exposure and Firm Dynamics [Credit Constraints and the Cyclicality of R&D Investment: Evidence from France]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 481-514.
    4. Abel M. Agoba, 2021. "Minimising the inflationary impact of fiscal deficits in Africa: The role of monetary, financial and political institutions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 724-740, January.
    5. Steinkamp, Sven & Westermann, Frank, 2018. "Systemic crisis and growth revisited: Has the global financial crisis marked a new era ?," Economics Letters, Elsevier, vol. 170(C), pages 50-54.
    6. Emmanuel Carré & Guillaume L’Œillet, 2017. "Une revue de la littérature récente sur le nexus finance-croissance après la crise : apports, limites et pistes de recherche," Revue d'économie financière, Association d'économie financière, vol. 0(3), pages 271-290.
    7. Emmanuel Carré & Guillaume L’œillet, 2018. "The Literature on the Finance–Growth Nexus in the Aftermath of the Financial Crisis: A Review," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 161-180, March.
    8. Izumi, Ryuichiro, 2020. "Financial stability with sovereign debt," Journal of Financial Stability, Elsevier, vol. 51(C).
    9. Sven Steinkamp & Frank Westermann, 2018. "Systemic Crisis and Growth Revisited: Has the Global Financial Crisis Marked a New Era?," CESifo Working Paper Series 7094, CESifo Group Munich.
    10. Song, Fenghua & Thakor, Anjan V., 2019. "Bank culture," Journal of Financial Intermediation, Elsevier, vol. 39(C), pages 59-79.

    More about this item

    Keywords

    Financial liberalization;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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