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Financial Sector Ups and Downs and the Real Sector: Up by the stairs, down by the parachute

Author

Listed:
  • Joshua Aizenman
  • Brian Pinto
  • Vladyslav Sushko

Abstract

We examine how financial expansion and contraction cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly asymmetric effects, with the majority of real sectors adversely affected by contractions, but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.

Suggested Citation

  • Joshua Aizenman & Brian Pinto & Vladyslav Sushko, 2011. "Financial Sector Ups and Downs and the Real Sector: Up by the stairs, down by the parachute," NBER Working Papers 17530, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17530
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    References listed on IDEAS

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    1. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
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    6. Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers 17228, National Bureau of Economic Research, Inc.
    7. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
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    11. Aizenman, Joshua & Sushko, Vladyslav, 2011. "Capital flows: Catalyst or Hindrance to economic takeoffs?," Santa Cruz Department of Economics, Working Paper Series qt79f5144f, Department of Economics, UC Santa Cruz.
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    Cited by:

    1. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.

    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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