Financial Development and the Instability of Open Economies

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Financial Development and the Instability of Open Economies

Show simple item record Banerjee, Abhijit Bacchetta, Philippe Aghion, Philippe 2010-11-15T15:32:22Z 2004
dc.identifier.citation Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee. 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51(6): 1107-1106. en_US
dc.identifier.issn 0304-3932 en_US
dc.description.abstract This paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies. Our basic model is a dynamic open economy model with a tradeable good produced with capital and a country-specific factor. We also assume that firms face credit constraints, with the constraint being tighter at a lower level of financial development. A basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies. This is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Similarly, full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development: phases of growth with capital inflows are followed by collapse with capital outflows. On the other hand, foreign direct investment does not destabilize. en_US
dc.description.sponsorship Economics en_US
dc.language.iso en_US en_US
dc.publisher Elsevier en_US
dc.relation.isversionof doi:10.1016/j.jmoneco.2003.12.001 en_US
dash.license LAA
dc.subject financial development en_US
dc.subject volatility en_US
dc.subject financial liberalization en_US
dc.title Financial Development and the Instability of Open Economies en_US
dc.type Journal Article en_US
dc.description.version Author's Original en_US
dc.relation.journal Journal of Monetary Economics en_US Aghion, Philippe 2010-11-15T15:32:22Z

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