Illiquidity, Financial Development and the Growth-Volatility Relationship Illiquidity, Financial Development and the Growth-Volatility Relationship

Enisse Kharroubi

Working papers from Banque de France

Abstract: This paper studies how financial development affects the relation between average growth and growth volatility through liquidity crises. We .first establish in a micro model that imperfect enforceability creates a short term bias in contracts financing long term investments. This can generate maturity mismatches between firms' assets and liabilities and lead to liquidity crises. Then with this mechanism, we show in a macro framework that the relation between average growth and growth volatility is more likely to be negative in developing countries, but more likely to be positive in developed economies. Finally we provide empirical evidence which supports the prediction of the model.

Keywords: Illiquidity; Debt maturity; Growth, Volatility; Financial development. (search for similar items in EconPapers)
JEL-codes: E44 G30 O16 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:139

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