Journal Article

Crises, Volatility, and Growth

Enisse Kharroubi

in The World Bank Economic Review

Volume 21, issue 3, pages 439-460
Published in print October 2007 | ISSN: 0258-6770
Published online October 2007 | e-ISSN: 1564-698X | DOI: http://dx.doi.org/10.1093/wber/lhm015
Crises, Volatility, and Growth

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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.

Keywords: E44; G30; O16

Journal Article.  8242 words.  Illustrated.

Subjects: Money and Interest Rates ; Corporate Governance ; Economic Development

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