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Systemic Crises and Growth

Listed author(s):
  • Romain Rancière

    (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, IMF - International Monetary Fund - International Monetary Fund (IMF))

  • Aaron Tornell

    (UCLA - University of California - UCLA - University of California at Los Angeles [Los Angeles], NBER - The National Bureau of Economic Research - NBER)

  • Frank Westermann

    (University of Osnabrueck - University of Osnabrueck, CESifo - CESifo)

Countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. Because financial crises are realizations of downside risk, we measure their incidence by the skewness of credit growth. Unlike variance, negative skewness isolates the impact of the large, infrequent, and abrupt credit busts associated with crises. We find a robust negative link between skewness and GDP growth in a large sample of countries over 1960-2000. This suggests a positive effect of systemic risk on growth. To explain this finding, we present a model in which contract enforceability problems generate borrowing constraints and impede growth. In financially liberalized economies with moderate contract enforceability, systemic risk taking is encouraged and increases investment. This leads to higher mean growth but also to greater incidence of crises. In the data, the link between skewness and growth is indeed strongest in such economies.

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Paper provided by HAL in its series Post-Print with number halshs-00754308.

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Length:
Date of creation: Feb 2008
Publication status: Published in Quarterly Journal of Economics, Oxford University Press (OUP), 2008, 123 (1), pp.359-406. <10.1162/qjec.2008.123.1.359>
Handle: RePEc:hal:journl:halshs-00754308
DOI: 10.1162/qjec.2008.123.1.359
Note: View the original document on HAL open archive server: https://hal-pjse.archives-ouvertes.fr/halshs-00754308
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

References listed on IDEAS
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