IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Financial development and the instability of open economies

  • Aghion, Philippe
  • Bacchetta, Philippe
  • Banerjee, Abhijit

This paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies. Our basic model is a dynamic open economy model with a tradeable good produced with capital and a country-specific factor. We also assume that firms face credit constraints, with the constraint being tighter at a lower level of financial development. A basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies. This is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Similarly, full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development: phases of growth with capital inflows are followed by collapse with capital outflows. On the other hand, foreign direct investment does not destabilize.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/B6VBW-4D10N01-2/2/94bc61eb6298b7fbf1191f3a581ba609
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 51 (2004)
Issue (Month): 6 (September)
Pages: 1077-1106

as
in new window

Handle: RePEc:eee:moneco:v:51:y:2004:i:6:p:1077-1106
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

References listed on IDEAS
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.:

as in new window
  1. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
  2. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Working Papers 00.07, Swiss National Bank, Study Center Gerzensee.
  3. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  4. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  5. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  6. Honkapohja, Seppo & Koskela, Erkki, 2002. "The Economic Crisis of the 1990s in Finland," Discussion Papers 683, The Research Institute of the Finnish Economy.
  7. Invernizzi, Sergio & Medio, Alfredo, 1991. "On lags and chaos in economic dynamic models," Journal of Mathematical Economics, Elsevier, vol. 20(6), pages 521-550.
  8. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "A Corporate Balance Sheet Approach to Currency Crises," CEPR Discussion Papers 3092, C.E.P.R. Discussion Papers.
  9. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  10. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
  11. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers 99.05, Swiss National Bank, Study Center Gerzensee.
  12. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1996. "Inflows of capital to developing countries in the 1990s," MPRA Paper 13707, University Library of Munich, Germany.
  13. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
  14. Leonardo Bartolini & Allan Drazen, 1996. "When Liberal Policies Reflect External Shocks, What Do We Learn?," NBER Working Papers 5727, National Bureau of Economic Research, Inc.
  15. Bacchetta, Philippe, 1992. "Liberalization of Capital Movements and of the Domestic Financial System," Economica, London School of Economics and Political Science, vol. 59(236), pages 465-74, November.
  16. Philippe Bacchetta & Eric van Wincoop, 1998. "Capital flows to Emerging Markets: Liberalization, Overshooting, and Volatility," Working Papers 98.01, Swiss National Bank, Study Center Gerzensee.
  17. Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1998. "A pecking order of capital inflows and international tax principles," Journal of International Economics, Elsevier, vol. 44(1), pages 45-68, February.
  18. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  19. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism And Macroeconomic Volatility," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1359-1397, November.
  20. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  21. Philippe BACCHETTA & CRamon CAMINAL, 1996. "Do Capital Market Imperfections Exacerbate Output Fluctuations ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9612, Université de Lausanne, Faculté des HEC, DEEP.
  22. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  23. Gian-Maria Milesi-Ferretti & Assaf Razin, 1998. "Current Account Reversals and Currency Crisis; Empirical Regularities," IMF Working Papers 98/89, International Monetary Fund.
  24. Miller, Merton, 1998. "Asian financial crisis," Japan and the World Economy, Elsevier, vol. 10(3), pages 355-358, July.
  25. Maurice Obstfeld, 1984. "Capital Flows, the Current Account, and the Real Exchange Rate: Consequences of Liberalization and Stabilization," NBER Working Papers 1526, National Bureau of Economic Research, Inc.
  26. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  27. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  28. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
  29. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  30. Maurice Obstfeld, 1986. "Capital Flows, the Current Account, and the Real Exchange Rate: Some Consequences of Stabilization and Liberalization," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 201-232 National Bureau of Economic Research, Inc.
  31. Michael Mussa & Giovanni Dell'Ariccia & Barry J. Eichengreen & Enrica Detragiache, 1998. "Capital Account Liberalization; Theoretical and Practical Aspects," IMF Occasional Papers 172, International Monetary Fund.
  32. Claudia Echeverria & Salim M. Darbar & R. B. Johnston, 1997. "Sequencing Capital Account Liberalization; Lessons From the Experiences in Chile, Indonesia, Korea, and Thailand," IMF Working Papers 97/157, International Monetary Fund.
  33. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  34. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:51:y:2004:i:6:p:1077-1106. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.