Systemic Crises and Growth

Romain Ranciere, Aaron Tornell and Frank Westermann
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Aaron Tornell: UCLA - University of California [Los Angeles] - UC - University of California, NBER - The National Bureau of Economic Research

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Abstract: Countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. Because financial crises are realizations of downside risk, we measure their incidence by the skewness of credit growth. Unlike variance, negative skewness isolates the impact of the large, infrequent, and abrupt credit busts associated with crises. We find a robust negative link between skewness and GDP growth in a large sample of countries over 1960-2000. This suggests a positive effect of systemic risk on growth. To explain this finding, we present a model in which contract enforceability problems generate borrowing constraints and impede growth. In financially liberalized economies with moderate contract enforceability, systemic risk taking is encouraged and increases investment. This leads to higher mean growth but also to greater incidence of crises. In the data, the link between skewness and growth is indeed strongest in such economies.

Date: 2008-02
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Citations: View citations in EconPapers (153)

Published in Quarterly Journal of Economics, 2008, 123 (1), pp.359-406. ⟨10.1162/qjec.2008.123.1.359⟩

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Related works:
Working Paper: Systemic Crises and Growth (2015)
Journal Article: Systemic Crises and Growth (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00754308

DOI: 10.1162/qjec.2008.123.1.359

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