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Systemic Crises and Growth

Author

Listed:
  • Romain Ranciere
  • Aaron Tornell
  • Frank Westermann

Abstract

In this paper, we document the fact that countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where weak institutions lead to severe financial constraints and low growth. Financial liberalization policies that facilitate risk-taking increase leverage and investment. This leads to higher growth, but also to a greater incidence of crises. Conditions are established under which the costs of crises are outweighed by the benefits of higher growth.

Suggested Citation

  • Romain Ranciere & Aaron Tornell & Frank Westermann, 2005. "Systemic Crises and Growth," CESifo Working Paper Series 1451, CESifo.
  • Handle: RePEc:ces:ceswps:_1451
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    financial constraints; growth and institutions; bailout guarantees; volatility; emerging markets;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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