Financial Sector Ups and Downs and the Real Sector : Big Hindrance, Little Help

This paper examines how financial expansion and contraction cycles affect the broader economy through their impact on eight real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contraction...

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Bibliographic Details
Main Authors:	Aizenman, Joshua, Pinto, Brian, Sushko, Vladyslav
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ABSOLUTE VALUE ACCOUNTING ADVANCED ECONOMIES ADVERSE EFFECT ADVERSE EFFECTS ADVERSE IMPACT AGGREGATE LEVEL AGRICULTURAL SECTOR AGRICULTURE ANNUAL GROWTH ANNUAL GROWTH RATE AVERAGE GROWTH AVERAGE GROWTH RATE AVERAGE LEVEL BALANCE SHEET BANK POLICY BANKING CRISES BANKING CRISIS BENCHMARK BOOM-BUST CYCLES BUFFER BUSINESS CYCLE BUSINESS CYCLES CAPITAL ACCOUNT CAPITAL ACCOUNT OPENNESS CAPITAL FLIGHT CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MOBILITY COLLATERAL COMPARATIVE ADVANTAGE CONTROL VARIABLE CONVERGENCE HYPOTHESIS CORRELATION COEFFICIENTS COUNTRY LEVEL CREDIT MARKETS CROSS-BORDER CAPITAL CUMULATIVE DISTRIBUTION CUMULATIVE DISTRIBUTION FUNCTION CURRENCY CURRENCY CRISES CURRENCY CRISIS DEBT DEFICITS DEFLATION DEPENDENT VARIABLE DEVELOPED COUNTRIES DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT INDICATORS DEVELOPMENT POLICY DIMINISHING RETURNS DOMESTIC DEMAND DUMMY VARIABLES ECONOMIC CONTRACTIONS ECONOMIC CRISIS ECONOMIC DOWNTURNS ECONOMIC GROWTH ECONOMIC IMPACT ECONOMIC LITERATURE ECONOMIC SECTORS ECONOMICS LETTERS EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL ESTIMATES ERROR TERM ESTIMATION RESULTS EXOGENOUS VARIABLES EXPLANATORY VARIABLES EXPORTS EXPOSURE EXTERNAL FINANCE EXTERNAL FINANCING FINANCIAL ASSETS FINANCIAL CAPITAL FINANCIAL COLLATERAL FINANCIAL CRISIS FINANCIAL DEPTH FINANCIAL DEVELOPMENT FINANCIAL INTEGRATION FINANCIAL INTERMEDIATION FINANCIAL MANAGEMENT FINANCIAL OPENNESS FINANCIAL SECTOR FINANCIAL SECTOR DEVELOPMENT FINANCIAL SHOCK FINANCIAL SHOCKS FINANCIAL STABILITY FINANCIAL STRESS FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FINANCIALLY OPEN ECONOMIES FIXED EFFECTS FOREIGN ASSETS FOREIGN CAPITAL FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FOREIGN EXCHANGE RESERVE FOREIGN EXCHANGE RESERVES FOREIGN RESERVES FUTURE RESEARCH GDP GDP PER CAPITA GLOBAL CURRENCY GLOBALIZATION GOVERNANCE INDICATORS GOVERNMENT EXPENDITURES GOVERNMENT SPENDING GROWTH RATE GROWTH RATES GROWTH THEORY HOLDING IMPORTS INCOME INFLATION INFLATION RATES INSURANCE INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL RESERVES INVESTMENT PROJECTS LAGGED GROWTH LAGGED VALUE LIBERALIZATION LIQUIDITY LIQUIDITY CRUNCH LONG-RUN GROWTH MACROECONOMICS MARGINAL EFFECT MARGINAL RETURNS MARKET LIQUIDITY MARKET VALUES MEAN GROWTH MONETARY FUND MORAL HAZARD MORTGAGE MORTGAGE LOANS NEGATIVE EFFECT NEGATIVE IMPACT NEOCLASSICAL GROWTH MODEL NORMAL DISTRIBUTION NULL HYPOTHESIS OPEN ECONOMIES OUTPUT OUTPUT COLLAPSES OUTPUT LOSS PANEL REGRESSIONS POLICY OPTIONS POLICY RESEARCH POLITICAL STABILITY POLITICAL TURMOIL POVERTY REDUCTION PRIVATE CAPITAL PRIVATE CAPITAL FLOW PRIVATE CAPITAL FLOWS PRIVATE INVESTMENT PRODUCTIVITY GROWTH PUBLIC GOOD PUBLIC INVESTMENT PUBLIC UTILITIES RAPID EXPANSION REAL ESTATE REAL GDP REAL GROWTH RATE REAL INTEREST REAL INTEREST RATE REAL INTEREST RATES RECESSION REGRESSION ANALYSIS REGULATORY REFORM RELATIVE WEIGHTS RESERVE ACCUMULATION RESERVE CURRENCY RESERVE HOLDINGS ROBUSTNESS CHECK RULE OF LAW SERIAL CORRELATION SOCIAL COSTS STABLE ECONOMIC GROWTH STATISTICAL ANALYSIS STRUCTURAL BREAK STRUCTURAL CHANGE TRADE OPENNESS VALUE ADDED WEALTH WORLD DEVELOPMENT INDICATORS
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111026090001 http://hdl.handle.net/10986/3626

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Summary:	This paper examines how financial expansion and contraction cycles affect the broader economy through their impact on eight real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others -- such as government, public utilities, and transportation -- also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have 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 by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms two to three times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness; relative predominance of construction, manufacturing, and wholesale and retail sectors; and low international reserves. Finally, the analysis finds that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of "up by the stairs, down by the elevator dynamics."

Financial Sector Ups and Downs and the Real Sector : Big Hindrance, Little Help

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