Aaron Tornell
Recent Papers
Systemic Crises and Growth (May 2007, forthcoming Quarterly Journal of Economics, jointly with Romain Ranciere and Frank Westermann),
Unpublished Appendix to Systemic Crises and Growth (May 2007)
Countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. Because financial crises are realizations of downside risk, we measure their incidence by the skewness of credit growth. Unlike variance, negative skewness isolates the impact of the large, infrequent and abrupt credit busts associated with crises. We find a robust negative link between skewness and GDP growth in a large sample of countries over 1960-2000. This suggests a positive effect of systemic risk on growth. To explain this finding, we present a model in which contract enforceability problems generate borrowing constraints and impede growth. In financially liberalized economies with moderate contract enforceability, systemic risk taking is encouraged and increases investment. This leads to higher mean growth, but also to greater incidence of crises. In the data, the link between skewness and growth is indeed strongest in such economies.
Decomposing
the Effects of Financial Liberalization: Growth vs. Crises (December 2006, Journal of Banking and
Finance, jointly with Romain Ranciere and Frank Westermann).
We present a new empirical decomposition of the
effects of financial liberalization on economic growth and on the incidence of
crises. Our empirical estimates show that the direct effect of financial
liberalization on growth by far outweighs the indirect effect via a higher
propensity to crisis. We also discuss
several models of financial liberalization and growth whose predictions are
consistent with our empirical findings.
Balance Sheet Effects, Bailout Guarantees and Financial Crises (2004, Review of Economic Studies,jointly with Martin Schneider).
This paper provides a model of boom-bust
episodes in middle income countries. It features balance-of-payments crises
that are preceded by lending booms and real appreciation, and followed by
recessions and sharp contractions of credit. As in the data, the nontradables
sector accounts for most of the volatility in output and credit. The model is
based on sectoral asymmetries in corporate finance. Currency mismatch and
borrowing constraints arise endogenously. Their interaction gives rise to
self-fulfilling crises.
ED and Miss jointly with
In this paper
http://www.econ.ucla.edu/people/papers/Tornell/Tornell265.pdf