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Liquidity, volatility and growth

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  • Enisse Kharroubi

Abstract

This paper studies the relation between average growth and growth volatility. To do so a two period model is built which focuses on how firms choose their debt portfolio maturity. Due to imperfect enforceability problems, we show that contracts financing long-term investments are biased towards short-term debt. This can generate maturity mismatches between assets and liabilities and lead to liquidity crises. Then it is shown that the relation between average growth and growth volatility is more likely to be negative in developing countries, i.e. economies where financial intermediaries assets are relatively small compared to the rest of the economy while it is more likely to be positive in developed economies, i.e. economies where financial intermediaries assets are relatively large compared to the rest of the economy. We therefore invalidate the idea that volatility is the price for rapid growth in emerging market countries. This framework also allows us to assess the impact of foreign direct investment (FDI) and financial opening (FO). We show that FDI has stabilizing effects in developing economies while FO has destabilizing effects. On the contrary in developed economies FO has stabilizing effects.

Suggested Citation

  • Enisse Kharroubi, 2004. "Liquidity, volatility and growth," DELTA Working Papers 2004-26, DELTA (Ecole normale supérieure).
  • Handle: RePEc:del:abcdef:2004-26
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    Cited by:

    1. Aitor Erce, 2012. "Does the IMF´s official support affect sovereign bond maturities?," Working Papers 1231, Banco de España;Working Papers Homepage.
    2. Aitor Erce, 2012. "Does the IMF's official support affect sovereign bonds maturities?," Globalization and Monetary Policy Institute Working Paper 128, Federal Reserve Bank of Dallas.

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