Working Paper: NBER ID: w9219
Authors: Aaron Tornell; Frank Westermann
Abstract: In this paper we characterize empirically the comovements of macro variables typically observed in middle income countries, as well as the boom-bust cycle' that has been observed during the last two decades. We find that many countries that have liberalized their financial markets, have witnessed the development of lending booms. Most of the time the boom gradually decelerates. But sometimes the boom ends in twin currency and banking crises, and is followed by a protracted credit crunch that outlives a short-lived recession. We also find that during lending booms there is a real appreciation and the nontradables (N) sector grows faster than the tradables (T) sector. Meanwhile, the opposite is true in the aftermath of crisis. We argue that these comovements are generated by the interaction of two characteristics of financing typical of middle income countries: risky currency mismatch and asymmetric financing opportunities across the N- and T-sectors.
Keywords: No keywords provided
JEL Codes: E32; E44; F32; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit growth (E51) | aggregate GDP growth (O40) |
| credit growth (E51) | consumption (E21) |
| lending booms in middle-income countries (F65) | twin currency and banking crises (F31) |
| twin currency and banking crises (F31) | real depreciation (F31) |
| twin currency and banking crises (F31) | protracted credit crunch (E51) |
| credit growth (E51) | faster growth of the nontradables sector (O49) |
| credit growth (E51) | changes in the real exchange rate (F31) |
| credit growth (E51) | investment growth (E20) |
| asymmetric financing opportunities and risky currency mismatch (F65) | self-reinforcing mechanism (D47) |
| self-reinforcing mechanism (D47) | vulnerability in the banking system (F65) |
| vulnerability in the banking system (F65) | crises (H12) |