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Title:Financial sector ups and downs and the real sector: Big hindrance, little help PDF Logo
Authors:Aizenman, Joshua
Pinto, Brian
Sushko, Vladyslav
Issue Date:2011
Series/Report no.:Working Papers, UC Santa Cruz Economics Department 689
Abstract:We examine how financial expansion and contraction cycles affect the broader economy through their impact on 8 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 2 to 3 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, we find that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of up by the stairs, down by the elevator dynamics.
Subjects:financial cycles
financial and trade openness
real transmission of financial shocks
reserves
JEL:F15
F31
F36
F4
Document Type:Working Paper
Appears in Collections:Working Papers, Economics Department, UC Santa Cruz

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