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Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute

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  • Aizenman, Joshua
  • Pinto, Brian
  • Sushko, Vladyslav

Abstract

We examine how financial 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.

Suggested Citation

  • Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2013. "Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute," Emerging Markets Review, Elsevier, vol. 16(C), pages 1-30.
  • Handle: RePEc:eee:ememar:v:16:y:2013:i:c:p:1-30
    DOI: 10.1016/j.ememar.2013.02.007
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    1. repec:pal:jbkreg:v:19:y:2018:i:1:d:10.1057_s41261-017-0054-z is not listed on IDEAS
    2. Stephen Oluwafemi Adeusi & Olufemi Adewale Aluko, 2015. "Relevance of Financial Sector Development on Real Sector Productivity: 21st Century Evidence from Nigerian Industrial Sector," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(6), pages 118-132, June.
    3. Eduardo Levy Yeyati & Jimena Zuniga, 2015. "Varieties of Capital Flows: What Do We Know?," CID Working Papers 296, Center for International Development at Harvard University.
    4. Broto, Carmen & Molina, Luis, 2016. "Sovereign ratings and their asymmetric response to fundamentals," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 206-224.
    5. Dietrich Domanski & Emanuel Kohlscheen & Ramon Moreno, 2016. "Foreign exchange market intervention in EMEs: what has changed?," BIS Quarterly Review, Bank for International Settlements, September.
    6. Gunther Capelle-Blancard & Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi & Bert Scholtens, 2016. "Environmental, Social and Governance (ESG) performance and sovereign bond spreads: an empirical analysis of OECD countries," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01401718, HAL.
    7. Kyoungsoo Yoon & Jayoung Kim, 2015. "Costs of Foreign Capital Flows in Emerging Market Economies: Unexpected Economic Growth and Increased Financial Market Volatility," Working Papers 2015-21, Economic Research Institute, Bank of Korea.
    8. Samargandi, Nahla & Kutan, Ali M., 2016. "Private credit spillovers and economic growth: Evidence from BRICS countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 56-84.
    9. Joshua Aizenman & Yothin Jinjarak & Donghyun Park, 2015. "Financial Development and Output Growth in Developing Asia and Latin America: A Comparative Sectoral Analysis," NBER Working Papers 20917, National Bureau of Economic Research, Inc.
    10. Bjarni G. Einarsson & Jósef Sigurdsson, 2013. "How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland," Economics wp64, Department of Economics, Central bank of Iceland.
    11. Michal Jurek, 2014. "Role and impact of different types of financial institutions on economic performance and stability of the real sector in selected EU member states," Working papers wpaper36, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    12. Martin Gächter & Martin Geiger & Florentin Glötzl & Helene Schuberth, 2015. "Sectoral Deleveraging in Europe and Its Economic Implications," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-23.

    More about this item

    Keywords

    Financial cycles; Financial and trade openness; Real transmission of financial shocks; Foreign exchange reserves;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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