Understanding the Relationship between Output Growth Expectations and Financial Crises
Working Paper #287
This paper explores two dimensions of the relationship between outputgrowth expectations and financial crises. The first dimension is the relationship between volatility of output growth expectations and the frequency of financial crises. I describe the conditions that are needed to explain the frequency of crises we observe in highly volatile economies, and I show how models with learning about output growth trends are able to generate those conditions. The second dimension is the relationship between volatility of output growth expectations and the severity of financial crises, measured by output losses. I report that more stability of expectations is associated with more severe debt and banking crises, consistent with the Minsky Financial Instability Hypothesis.
Keywords: Expectations, Volatility, Financial Crises
About the Author
Associate Research Scholar
Graduate School of Business
Martin Guzman is a Associate Research Fellow at Columbia University Graduate School of Business and an Associate Professor at Universidad de Buenos Aires.
He is a co-chair of Columbia University Initiative for Policy Dialogue's Taskforce on Debt Restructuring and Sovereign Bankruptcy, and a member of the INET Research Group on "Macroeconomic Externalities” chaired by Professor Joseph Stiglitz. He is also a Senior Fellow in CIGI’s Global Economy Program. He is an Editor of the Journal of Globalization and Development.
He holds a PhD in Economics from Brown University. His research fields are Macroeconomics and Economic Development.