Working Paper: NBER ID: w17530
Authors: 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.
Keywords: financial sector; real economy; financial contraction; financial expansion; emerging markets
JEL Codes: F15; F31; F36; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial sector value added (G29) | nonfinancial sector cycles (E32) |
| foreign exchange reserves (F31) | severity of negative impact of financial contractions (F65) |
| financial sector expansion (O16) | real sectors (R30) |
| financial sector contraction (G21) | construction sector value added (L74) |
| financial sector contraction (G21) | growth rates of various real sectors (O40) |