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Boom-Bust Cycles and Financial Liberalization : CESifo BOOK SERIES - Aaron Tornell

Boom-Bust Cycles and Financial Liberalization


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The volatility that has hit many middle-income countries (MICs) after liberalizimg their financial markets has prompted critics to call for new policies to stabilize these boom-bust cycles. But, as Aaron Tornell and Frank Westermann point out in this book, over the last two decades most of the developing countries that have experienced lending booms and busts have also exhibited the fastest growth among MICs. Countries with more stable credit growth, by contrast, have exhibited, on average, lower growth rates. Factors that contribute to financial fragility thus appear, paradoxically, to be a source of long-run growth as well. Tornell and Westermann analyze boom-bust cycles in the developing world and discuss how these cycles are generated by credit market imperfections. They explain why the financial liberalization that allows countries to overcome imperfections impeding rapid growth also generates the financial fragility that leads to greater volatility and occasional crises. The conceptual framework they present illustrates this linkage and allows Tornell and Westermann to address normative questions regarding liberalization policies.The authors also characterize key macroeconomic regularities observed across MICs, showing that credit markets play a key role not only in boom-bust episodes but in the strong "credit channel" observed during tranquil times. A theoretical framework is then presented that explains how credit market imperfections can account for these empirical patterns. Finally, Tornell and Westermann provide microeconomic evidence on the credit market imperfections that drive the results of the theoretical framework, finding that asymmetries between tradables and nontradables are key to understanding the patterns in MIC data.

Industry Reviews

"The authors successfully resolve what has been the most vexing problem in development finance: Should middle-income countries liberalize domestic interest rates and free international capital flows in the presence of domestic credit market distortions and moral hazard from government rescue operations? Tornell and Westermann show that financial fragility, and the possibility of major crashes, naturally increase with such financial liberalization. But such liberalization also stimulates growth, albeit unevenly, over the longer term. A must-read for students of development finance."--Ronald I. McKinnon, William D. Eberle Professor of International Economics, Stanford University

Series Forewordp. ix
Acknowledgmentsp. xi
Introductionp. 1
Road Mapp. 7
The Long Run: Liberalization, Growth, and Crisesp. 21
The Short Run: Boom-Bust Cycles and the Credit Channelp. 47
The Conceptual Frameworkp. 87
Credit Market Imperfections in Middle-Income Countriesp. 117
Conclusions and Policy Implicationsp. 141
Data Sources and Definitionsp. 147
Notesp. 155
Referencesp. 167
List of Abbreviationsp. 175
Indexp. 177
Table of Contents provided by Ingram. All Rights Reserved.

ISBN: 9780262201599
ISBN-10: 0262201593
Audience: Professional
For Ages: 22+ years old
Format: Hardcover
Language: English
Number Of Pages: 168
Published: 1st November 2005
Country of Publication: US
Dimensions (cm): 23.5 x 15.88  x 1.91
Weight (kg): 0.43