Crises, Volatility, and Growth

How do volatility and liquidity crises affect growth? When creditis constrained, a bias toward short-term debt can arise in financinglong-term investments, generating maturity mismatches and leadingpotentially to liquidity crises. The frequency of liquiditycrises ("abnormal" volatility) and the volatility of growth("normal" volatility) are found to have independent negativeeffects on growth. Financial development however dampens thegrowth cost of volatility, but only in the case of normal volatility.The growth cost of volatility therefore depends critically onthe composition of normal and abnormal volatility, the latterbeing more costly for growth.