Boom-bust cycles and financial liberalization / Aaron Tornell and Frank Westermann

Includes bibliographical references (pages [155]-174) and index

1. Introduction -- 2. Road map -- 3. The long run : liberalization, growth, and crises -- 4. The short run : boom-bust cycles and the credit channel -- 5. The conceptual framework -- 6. Credit market imperfections in middle-income countries -- 7. Conclusions and policy implications

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 Aaron Tornell and Frank 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."--BOOK JACKET