International Evidence onRecovery from Recessions
Valerie Cerra, Ugo Panizza, and Sweta C. Saxena
WP/09/183
© 2009 International Monetary Fund WP/09/
183
IMF Working Paper
IMF Institute
International Evidence on Recovery from RecessionsPrepared by Valerie Cerra, Ugo Panizza, and Sweta C. Saxena
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Authorized for distribution by Alex MourmourasAugust 2009
Abstract
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily representthose of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
Although negative shocks have persistent effects on output on average, this paper shows thatmacroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence of the shock. Indeed, monetary and fiscal stimulus andforeign aid can spur a rebound, with impacts that are asymmetrically stronger than in non-recovery years. Real depreciation and the exchange rate regime also have asymmetric growtheffects in a recovery year relative to other years of expansion. Recoveries are more sluggishin open economies, partly because fiscal policy is less effective than in closed economies.JEL Classification Numbers: C23; E32; F43; O43Keywords: Economic recovery; Growth; Recession; Business cycles; Rebound; Output lossAuthors’ E-mail addresses: vcerra@imf.org; ugo.panizza@unctad.org; ssaxena@imf.org
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We would like to thank Enrica Detragiache, Jeremy Piger, and participants at an IMF Institute seminar for helpfulcomments and suggestions, and William Sayavongsa for excellent research assistance.
2 Contents PageI. Introduction............................................................................................................................3II. Methodology and Data..........................................................................................................4III. Results..................................................................................................................................6IV. The Aftermath of Banking Crises......................................................................................12V. Conclusions.........................................................................................................................13TablesTable 1: Speed of Recovery after Recessions (FE regressions)..............................................15Table 2: Countries with population less than 1 million are excluded from the sample...........15Table 3: Country Size..............................................................................................................15Table 4: Monetary Policy.........................................................................................................15Table 5: Fiscal Policy...............................................................................................................16Table 6: Fiscal Policy (alternative definition).........................................................................16Table 7: Foreign Aid................................................................................................................16Table 8: Exchange Rate Regime (Floating).............................................................................17Table 9: Exchange Rate Regime (Fixed and Intermediate).....................................................17Table 10: Exchange Rate Regime and Currency Crises (Floating).........................................18Table 11: Exchange Rate Regime and Currency Crises (Fixed and Intermediate).................18Table 12: The Real Exchange Rate..........................................................................................19Table 13: The Real Exchange Rate and Currency Crises........................................................19Table 14: Labor Market Rigidities...........................................................................................19Table 15: Effective Labor Market Rigidities...........................................................................20Table 16: Trade Openness.......................................................................................................20Table 17: Trade Openness and Country Size...........................................................................20Table 18: Trade Openness and Real External Shocks.............................................................21Table 19: Trade Openness and Depth of Recession................................................................21Table 20: Trade Openness and Fiscal Policy (alternative definition)......................................22Table 21: Capital Account Openness.......................................................................................22Table 22: Capital Account Openness and Trade Openness.....................................................23Table 23: Controlling for Depth of Recession.........................................................................23Table 24: Normal Recessions and Banking Crises..................................................................23Table 25: Normal Recessions and Banking Crises. The Effect of Fiscal Policy.....................24Table 26: Normal Recessions and Banking Crises. The Effect of Foreign Aid......................24Table 27: Normal Recessions and Banking Crises. The Effect of Openness..........................25Table 28: Normal recessions and Banking Crises. The Effect of the Exchange Rate Regime25Appendix: Data sources...........................................................................................................26References................................................................................................................................28
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International Evidence on Recovery From Recessions (IMF Working Paper)
Abstract of the Paper: Although negative shocks have persistent effects on output on average, this paper shows that macroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence…
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