The World Bank Economic Review Advance Access published online on October 10, 2007
The World Bank Economic Review, doi:10.1093/wber/lhm015
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Crises, Volatility, and Growth
Enisse Kharroubi is an economist at the Bank of France; his email address is enisse.kharroubi{at}banque-france.fr. The author is grateful to Arturo Galindo, Jim de Melo, Norman Loayza, Henri Pagès, Romain Rancière, Mathias Thoenig, Thierry Tressel, Thierry Verdier, two anonymous referees for their useful comments and suggestions, as well as to the participants in the seminars at the Bank of France; the Department and Laboratory of Applied and Theoretical Economics (DELTA), École Normale Supérieure, Paris; the European Economics Association Summer Meetings; the Money Macro and Financial Research Group Conference; the International Monetary Fund–Pompeu Fabra University Conference; the Theory and Method of Macroeconomics (T2M) Conference; and the Venice University Summer School. The views are those of the author and do not necessarily reflect those of the Bank of France
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.