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The World Bank Economic Review Advance Access originally published online on October 10, 2007
The World Bank Economic Review 2007 21(3):439-460; doi:10.1093/wber/lhm015
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Right arrow E32 - Business Fluctuations; Cycles
Right arrow E44 - Financial Markets and the Macroeconomy
Right arrow G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Right arrow G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Right arrow K12 - Contract Law
Right arrow O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Right arrow O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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© The Author 2007. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Crises, Volatility, and Growth

Enisse Kharroubi

Enisse Kharroubi is an economist at the Bank of France; his email address is enisse.kharroubi{at}banque-france.fr

JEL codes: E44, G30, O16

How do volatility and liquidity crises affect growth? When credit is constrained, a bias toward short-term debt can arise in financing long-term investments, generating maturity mismatches and leading potentially to liquidity crises. The frequency of liquidity crises ("abnormal" volatility) and the volatility of growth ("normal" volatility) are found to have independent negative effects on growth. Financial development however dampens the growth cost of volatility, but only in the case of normal volatility. The growth cost of volatility therefore depends critically on the composition of normal and abnormal volatility, the latter being more costly for growth.


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