Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth
American Economic Journal: Macroeconomics
vol. 8,
no. 2, April 2016
(pp. 1-44)
Abstract
Financial liberalization increases growth, but leads to more crises and costly bailouts. We present a two-sector model in which liberalization, by allowing debt-denomination mismatch, relaxes borrowing limits in the financially constrained sector, but endogenously generates crisis risk. When regulation restricts external financing to standard debt, liberalization preserves financial discipline and may increase allocative efficiency, growth, and consumption possibilities. By contrast, under unfettered liberalization that also allows uncollateralized option-like liabilities, discipline breaks down, and efficiency falls. The model yields a testable gains-from-liberalization condition, which holds in emerging markets. It also helps rationalize the contrasting experience of emerging markets and the recent US housing crisis. (JEL E23, E44, G01, G21, G28, O41, R31)Citation
Rancière, Romain, and Aaron Tornell. 2016. "Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth." American Economic Journal: Macroeconomics, 8 (2): 1-44. DOI: 10.1257/mac.20130190Additional Materials
JEL Classification
- E23 Macroeconomics: Production
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- O41 One, Two, and Multisector Growth Models
- R31 Housing Supply and Markets
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