Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth

Romain Ranciere and Aaron Tornell
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Aaron Tornell: UCLA - University of California [Los Angeles] - UC - University of California

PSE-Ecole d'économie de Paris (Postprint) from HAL

Abstract: Financial liberalization increases growth, but leads to more crises and costly bailouts. We present a two-sector model in which liberalization, by allowing debt-denomination mismatch, relaxes borrowing limits in the financially constrained sector, but endogenously generates crisis risk. When regulation restricts external financing to standard debt, liberalization preserves financial discipline and may increase allocative efficiency, growth, and consumption possibilities. By contrast, under unfettered liberalization that also allows uncollateralized option-like liabilities, discipline breaks down, and efficiency falls. The model yields a testable gains-from-liberalization condition, which holds in emerging markets. It also helps rationalize the contrasting experience of emerging markets and the recent US housing crisis.

Keywords: Financial; liberalization (search for similar items in EconPapers)
Date: 2016-04
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Citations: View citations in EconPapers (17)

Published in American Economic Journal: Macroeconomics, 2016, 8 (2), pp.1-44. ⟨10.1257/mac.20130190⟩

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Journal Article: Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth (2016)
Working Paper: Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-01314278

DOI: 10.1257/mac.20130190

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