In this paper we document three credit market imperfections prevalent in middle income countries that can help to explain boom-bust cycles, as well as other macroeconomic patterns observed at higher frequencies across these countries.These imperfections are: the existence of financing constraints that affect mainly the nontradables sector, currency mismatch and guarantees that cover lenders against systemic crises.In MICs T-sector firms have access to international capital markets, while most N-firms are bank-dependent and are financially constrained.Systemic guarantees generate incentives for borrowers to take on insolvency risk by denominating debt in foreign currency.This currency mismatch makes movements in the real exchange rate --the relative price between N and T goods--the driving element in the amplification of shocks.
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