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Illiquidity, Financial Development and the Growth-Volatility Relationship Illiquidity, Financial Development and the Growth-Volatility Relationship

  • Kharroubi, E.

This paper studies how financial development affects the relation between average growth and growth volatility through liquidity crises. We .first establish in a micro model that imperfect enforceability creates a short term bias in contracts financing long term investments. This can generate maturity mismatches between firms' assets and liabilities and lead to liquidity crises. Then with this mechanism, we show in a macro framework that the relation between average growth and growth volatility is more likely to be negative in developing countries, but more likely to be positive in developed economies. Finally we provide empirical evidence which supports the prediction of the model.

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Paper provided by Banque de France in its series Working papers with number 139.

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Length: 40 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bfr:banfra:139
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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  28. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1998. "Financial Liberalization and Volatility in Emerging Market Economies," Working Papers 98.02, Swiss National Bank, Study Center Gerzensee.
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