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Systemic Crises and Growth

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  • 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 contract enforce-ability problems generate borrowing constraints and impede growth. In the set of financially liberalized countries with a moderate degree of contract enforceability, systemic risk-taking relaxes borrowing constraints and increases investment. This leads to higher mean growth, but also to greater incidence of crises. We find that the negative link between skewness and growth is indeed strongest in this set of countries, validating the restrictions imposed by the model's equilibrium.

Suggested Citation

  • Romain Ranciere & Aaron Tornell & Frank Westermann, 2005. "Systemic Crises and Growth," NBER Working Papers 11076, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11076
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    More about this item

    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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