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

Joshua Aizenman, Brian Pinto and Vladyslav Sushko

No 17530, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F15 F31 F36 F4 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-cis, nep-fdg, nep-ifn and nep-opm
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Published as "Financial Sector Ups and Downs and the Real Sector: Up by the Stairs and Down by the Parachute," (with B. Pinto and V. Sushko), Emerging Markets Review, 2013, 16, pp 1-30.

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