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

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Author Info
Aaron Tornell
Frank Westermann

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9219.

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Date of creation: Sep 2002
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Publication status: published as Tornell, Aaron and Frank Westermann. "Boom-Bust Cycles In Middle Income Countries," International Monetary Fund Staff Papers, 2002, v49(Spec), 111-155.
Handle: RePEc:nbr:nberwo:9219

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  22. Graciela L. Kaminsky & Carmen M. Reinhart, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June. [Downloadable!] (restricted)
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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram G, 2005. "The Real Effect of Banking Crises," CEPR Discussion Papers 5088, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Nanno Mulder & Anne-Laure Baldi, 2004. "The Impact of Exchange Rate Regimes on Real Exchange Rates: ABC and Mexico in the 1990s," Econometric Society 2004 Latin American Meetings 45, Econometric Society. [Downloadable!]
  3. Thierry Tressel & Thierry Verdier, 2007. "Financial Globalization and the Governance of Domestic Financial Intermediaries," IMF Working Papers 07/47, International Monetary Fund. [Downloadable!]
  4. Julia Darby & Anton Muscatelli & Graeme Roy, 2004. "Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants: Evidence from an Event Study," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  5. Michal Brzoza-Brzezina, 2005. "Lending booms in the new EU Member States - will euro adoption matter?," Working Paper Series 543, European Central Bank. [Downloadable!]
  6. Henry Kim & Soyoung Kim & Yunjong Wang, 2005. "International Capital Flows and Boom-Bust Cycles in the Asia Pacific Region," Discussion Papers Series, Department of Economics, Tufts University 0506, Department of Economics, Tufts University. [Downloadable!]
  7. Guido Lorenzoni, 2007. "Inefficient Credit Booms," NBER Working Papers 13639, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Yannick Kalantzis, 2005. "Financial fragility in emerging market countries: firm balance sheets and the productive structure," PSE Working Papers 2005-17, PSE (Ecole normale supérieure). [Downloadable!]
  9. Daniel Ottens & Edwin Lambregts & Steven Poelhekke, 2005. "Credit Booms in Emerging Market Economies: A Recipe for Banking Crises?," DNB Working Papers 046, Netherlands Central Bank, Research Department. [Downloadable!]
  10. Julia Darby & V. Anton Muscatelli & Graeme Roy, . "How do Sub-Central Government react to cuts in grants received from Central Governments Evidence from a Panel of 15 OECD Countries," Working Papers 2005_18, Department of Economics, University of Glasgow, revised Jun 2005. [Downloadable!]
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  18. Jaime Guajardo, 2008. "Financial Frictions and Business Cycles in Middle-Income Countries," IMF Working Papers 08/20, International Monetary Fund. [Downloadable!]
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