Boom-Bust Cycles in Middle Income Countries: Facts and Explanation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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 Nand T-sectors. JEL Classification: E32, E44, F32, F44. Terms of use: Documents in

Inefficient Credit Booms

“…Proceeding as in the proof of Lemma 4, I can show that (43) implies that the entrepreneur's utility is zero, contradicting the assumption that it is positive. Second, k * 0 > 0 and (43) imply that k * 1s > 0.…”

“…By investing more in the first period the entrepreneur earns higher revenues if the good shock 1 For the main stylized facts on boom-bust cycles see Gourinchas, Valdes and Landerretche (2001), Borio and Lowe (2002), Bordo and Jeanne (2002), Tornell and Westermann (2002), Ranciere, Tornell and Westermann (2003). 2 See Borio (2003) and references therein.…”

Financial Globalization and the Governance of Domestic Financial Intermediaries

“…The stylized facts are now well known. A credit boom associated with a surge in capital flows precedes a sudden reversal which precipitates a credit crunch followed by a fall in real credit to the private sector (Tornell and Westerman, 2002;Schneider and Tornell, 2004). The evidence showed that lending booms leading to twin crisis were often preceded by capital account liberalization (Kaminsky and Reinhart, 1999;Demirguc-Kunt and Detragiache, 2005).…”

Credit Booms in Developing Countries: Are They Different from Those in Advanced and Emerging Market Countries?

“…A number of studies employ statistical techniques, for example, Terrones (2008, 2012), Gourinchas, Valdes and Landarretch (2001), Barajas, Dell'Ariccia andLevchenko (2009), Tornell andWestermann (2002), IMF (2011), Dell'Ariccia et al (2012, and Arena et al (2015). They compare a country's credit-to-GDP ratio or real credit per capita to its nonlinear trend and determine the episodes of credit booms when the positive deviations from trend pass a certain threshold.…”