103 103
3
c h a p t e r
Note: The main authors o this chapter are MarcoE. Terrones, Alasdair Scott, and Prakash Kannan, withsupport rom Gavin Asdorian and Emory Oakes. FrancisDiebold and Don Harding provided consultancy support. Jörg Decressin was the chapter supervisor.
From recession to recovery: How soon andHow strong?
This chapter examines recessions and recoveries in advanced economies and the role of countercyclical macroeconomic policies. Are recessions and recoveries associated with financial crises different from others? What are the main features of globally synchronized recessions? Can countercylical policies help shorten recessions and strengthen recoveries? The results suggest that recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized reces- sions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast,expansionary fiscal policy seems particularly effective in shortening recessions associated with financial cri- ses and boosting recoveries. However, its effectiveness is a decreasing function of the level of public debt.These findings suggest the current recession is likely to be unusually long and severe and the recovery slug- gish. However, strong countercyclical policy action,combined with the restoration of confidence in the financial sector, could help move the recovery forward.
T
he global economy is experiencing thedeepest downturn in the post–World War II period, as the nancial crisisrapidly spreads around the world (seeChapters 1 and 2). A large number o advancedeconomies have allen into recession, andeconomies in the rest o the world have slowedabruptly. Global trade and nancial fows areshrinking, while output and employment lossesmount. Credit markets remain rozen as bor-rowers are engaged in a drawn-out deleveragingprocess and banks struggle to improve theirnancial health.Many aspects o the current crisis are new andunanticipated.
1
Uniquely, the current disrup-tion combines a nancial crisis at the heart o the world’s largest economy with a globaldownturn. But nancial crises—episodes during which there is widespread disruption to nan-cial institutions and the unctioning o nancialmarkets—are not new.
2
Nor are globally syn-chronized downturns. Thereore, history can bea useul guide to understanding the present.To put the current cycle in historical per-spective, this chapter addresses some broadquestions about the nature o recessions andrecoveries and the role o countercyclical poli-cies. In particular,• Are recessions and recoveries associated withinancial crises dierent rom other types o recessions and recoveries?• Are globally synchronized recessions dierent?• What role do policies play in determining theshape o recessions and recoveries?To shed light on these questions, this chap-ter examines the dynamics o business cyclesover the past hal century. It complementsexisting literature on the business cycle alongseveral dimensions.
These include a compre-hensive study o recessions and recoveries in21 advanced economies,
a classication o
1
For detailed accounts o the nancial aspects o thiscrisis, see IMF (2008), Greenlaw and others (2008), andBrunnermeier (2009).
2
A classic analysis o nancial crises is Kindleberger(1978). Reinhart and Rogo (2008b) show that nan-cial crises have occurred with “equal opportunity” inadvanced and less advanced economies.
In particular, this work builds on Chapter o the April 2002
World Economic Outlook
, Chapter o the Octo-ber 2008
World Economic Outlook
, and Claessens, Kose, andTerrones (2008).
The sample includes the ollowing countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France,Germany, Greece, Ireland, Italy, Japan, Netherlands, NewZealand, Norway, Portugal, Spain, Sweden, Switzerland,United Kingdom, and United States.
cHapter 3
From recession to recovery: How soon and How strong?
104
recessions based on their underlying sources,and an assessment o the impact o scal andmonetary policies in recessions and recoveries.Similar to most other studies in this area, thechapter makes extensive use o event analysisand statistical associations.The main ndings o the chapter related tocommon elements across business cycles are asollows:• Recessions in the advanced economies overthe past two decades have become less re-quent and milder, whereas expansions havebecome longer, relecting in part the “Great Moderation” o advanced economies’ businesscycles.• Recessions associated with inancial crises havebeen more severe and longer lasting thanrecessions associated with other shocks. Recov-eries rom such recessions have been typically slower, associated with weak domestic demandand tight credit conditions.• Recessions that are highly synchronizedacross countries have been longer and deeperthan those conined to one region. Recover-ies rom these recessions have typically been weak, with exports playing a much more lim-ited role than in less synchronized recessions.The implications o these ndings or thecurrent situation are sobering. The current downturn is highly synchronized and is associ-ated with a deep nancial crisis, a rare combi-nation in the postwar period. Accordingly, thedownturn is likely to be unusually severe, andthe recovery is expected to be sluggish. It is not surprising, thereore, that many commentatorslooking or historical parallels or the current episode ocus on the Great Depression o the190s, by ar the deepest and longest recessionin the history o most advanced economies (dis-cussed urther in Box .1).Regarding policies, these are the mainndings:• Monetary policy seems to have played animportant role in ending recessions andstrengthening recoveries. Its eectiveness,however, is weakened in the atermath o ainancial crisis.• Fiscal stimulus appears to be particularly help-ul during recessions associated with inancialcrises. Stimulus is also associated with strongerrecoveries; however, the impact o iscal policy on the strength o the recovery is ound to besmaller or economies that have higher levelso public debt.This suggests that in order to mitigatethe severity o the current recession and tostrengthen the recovery, aggressive monetary and particularly scal measures are needed tosupport aggregate demand in the short term,but care must be taken to preserve public debt sustainability over the medium run. Even withsuch measures, a return to steady economicgrowth depends on restoring the health o the nancial sector. Indeed, one o the most important lessons rom the Great Depression,and rom more recent episodes o nancialcrisis, is that restoring condence in the nan-cial sector is key or recovery to take hold (seeBox .1).The chapter is structured as ollows. Therst section presents key stylized acts onrecessions and recoveries or the advancedeconomies during the past 50 years. Thesecond section reviews the key dierencesacross recessions and recoveries resulting romdierent types o shocks and dierent degreeso synchronization. Particular attention is paidto the infuence o nancial crises. The thirdsection analyzes the eects o discretionary monetary and scal policies on the severity o recessions and on the strength o recoveries.It also examines how the level o public debt conditions the eectiveness o scal policy.The last section places the current downturnin historical perspective and discusses somepolicy implications.
Bu cl h ae
To put the current recession in historicalperspective, we rst identiy the eatures o prior cycles. Each cycle is divided into two mainphases: a recession phase, characterized by a
105
Business cycles in tHe advanced economies
The current global crisis is the most severeinancial crisis since the Great Depression, which invites comparisons with this historicalprecedent. This box compares the current crisis with the Great Depression, with a particularocus on the unique inancial conditions prevail-ing at the onset o each event.
1
From a U.S. Recession to the Great Depression
The Great Depression remains the most severe recession on record in the United Statesand many other countries (irst igure). Output ell sharply, unemployment skyrocketed, andprices ell in a delationary spiral. There isbroad agreement about the process by whicha severe recession in the United States evolvedinto a global depression:
2
•
A recession began in the United States in August 1929. A tightening o monetary policy during the previous year, aimed at stemmingstock market speculation, is widely seen asthe initial cause. The stock market crashedin October 1929, which prompted a sharpdecline in consumption, partly because o increased uncertainty about uture income.
•
The recession intensiied and turned into adepression over the course o 191–2. Perni-cious eedback loops between the inancialsector and the real economy emerged, lead-ing to entrenched debt delation
and our waves o bank runs and ailures between 190and 19. Private consumption and invest-ment contracted sharply.
The main author o this box is Thomas Helbling.
1
Bordo (2008), Eichengreen (2008), and Romer(2009) also undertake historical comparisons.
2
See Bernanke (199), Romer (199), Calomiris(199), Eichengreen (1992), and Temin (1989, 199).
Declining prices o goods and services increase thereal burden o nominal debt and impair the credit- worthiness o borrowers, which reduces their ability toborrow (or renance) and spend, thereby reinorcingthe contraction in aggregate demand and downwardpressure on prices (Fisher, 19). This, in turn, alsoreduces the creditworthiness o nancial intermediar-ies because o increased credit risk.
•
The U.S. downturn exerted contractionary eects on a worldwide scale. The stock mar-ket crash led to price alls and wealth losseselsewhere, while declining U.S. aggregatedemand had an adverse international eect through trade channels. Moreover, the inan-cial crisis in the United States spread directly to the rest o the world through a number o channels, including diminished U.S. capitaloutlows. The gold exchange standard prevail-ing at the time is widely seen as a major trans-mission channel, as gold outlows into theUnited States led to a tightening o domesticmonetary conditions in other countries.There is broad agreement that the lack o acoherent macroeconomic policy response inthe United States and many other countries was
Bx 3.1. H sl i h cu c h g d?
19293031323334353637406080100120140192930313233343536375060708090100110
Activity and Prices during the Great Depression
(1929 = 100)
Sources: Mitchell (2003, 2007).
Industrial ProductionWholesale Prices
United StatesUnited KingdomGermanyFrance
of 00
IMF
1,648 Reads
Info and Rating
| Category: | Uncategorized. |
| Rating: | (1 Rating) |
| Upload Date: | 04/17/2009 |
| Copyright: | Attribution Non-commercial |
| Tags: |
Leave a Comment