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

Author

Listed:
  • Aaron Tornell

    (UCLA)

  • Frank Westermann

    (University of Munich and Ifo Institute)

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 exchange rate 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 Copyright 2002, International Monetary Fund

Suggested Citation

  • 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.
  • Handle: RePEc:pal:imfstp:v:49:y:2002:i:si:p:111-155
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    More about this item

    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
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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