Systemic Crises and Growth

In this paper, we document the fact that countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where contract enforce-ability problems generate borrowing constraints and impede growth. In the set of financially liberalized countries with a moderate degree of contract enforceability, systemic risk-taking relaxes borrowing constraints and increases investment. This leads to higher mean growth, but also to greater incidence of crises. We find that the negative link between skewness and growth is indeed strongest in this set of countries, validating the restrictions imposed by the model's equilibrium.