Financial Crises Tend to Have Long Impact on the Economy
| Author | International Monetary Fund |
The study finds that banking crises typically have a long-lasting impact on the level of output, although growth eventually recovers. Lower employment, investment, and productivity all contribute to sustained output losses. While there is a strong association between the initial economic conditions and the size of the ultimate output loss, short-run macroeconomic stimulus and sustained structural reform efforts may help reduce ultimate output losses, according to the study released as part of the IMF's World Economic Outlook (WEO).
The findings, according to authors Ravi Balakrishnan, Petya Koeva Brooks, Daniel Leigh, Irina Tytell, and Abdul Abiad, suggest that the forceful macroeconomic policy response so far may help mitigate the losses. Implementing structural reforms could also help to limit output losses, says the report, "What's the Damage? Medium-term Output Dynamics after Financial Crises," published as Chapter 4 of the WEO.
The IMF will publish its full global economic forecast on October 1 in Istanbul. But even as the global economy begins to recover from the most severe financial crisis since the Great Depression and the deepest recession since World War II, financial systems remain impaired and domestic and external imbalances persist in many economies.
In this context, the study uses the aftermath of past financial crises to provide useful insights into the medium-run prospects for economies currently recovering from the present crisis. Specifically, what happens to output over the medium run following financial crises? And what can be said about the role of policies after a crisis?
To answer these questions, the study looks at the medium-term output dynamics after 88 banking crises in advanced, emerging market, and developing economies over the past 40 years. The research also seeks to explain the substantial variation in medium-term outcomes, relating it to precrisis conditions and postcrisis policies.
For the average country, output per capita declines by about 10 percent of its precrisis trend and fails to rebound seven years after the crisis, although there is a large variation in outcomes across crisis episodes. This result holds for both advanced and emerging economies.
The good news is that, on average, banking crises do not seem to permanently decrease medium-term output growth, although the...
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