Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute

Joshua Aizenman, Brian Pinto, Vladyslav Sushko

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

We examine how financial cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly asymmetric effects, with the majority of real sectors adversely affected by contractions, but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.

Original languageEnglish
Pages (from-to)1-30
Number of pages30
JournalEmerging Markets Review
Volume16
Issue number1
DOIs
StatePublished - 1 Sep 2013
Externally publishedYes

Keywords

  • Financial and trade openness
  • Financial cycles
  • Foreign exchange reserves
  • Real transmission of financial shocks

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics

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