Are Recoveries from Banking and Financial Crises Really So Different?
Greg Howard, Robert Martin, and Beth Anne Wilson
International Finance Discussion Papers
2011-1037 (November 2011)
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Abstract: This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.

Full document after the jump

ifdp1037

Category: Cycles, Economy, Federal Reserve, Think Tank

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One Response to “Are Recoveries from Banking and Financial Crises Really So Different?”

  1. constantnormal says:

    I have my own take on this, from my own (admittedly casual) reading on the subject. The current situation is not unique, there have been several others that were of a similar breadth — the Great Depression (1930-1940), the Mississippi Scheme and the South Sea Bubble (both of which collapsed around 1720 and decimated the English economy for several decades) — and while our current situation has signs of a (slow) improvement, there is no clue as to when things might return to “normal”. I suspect that the boomer demographic bubble will magnify the duration of the current troubles, due to the boomers eventually (whether they want to or not) becoming retirees, and radically altering their spending habits.

    Looking at this collection of four extraordinary downturns, a few facets stand out …

    *) fraud and corruption being essential elements of these panics.

    *) huge amounts of leverage, widely available and adopted by the public in general, usually without their knowing what leverage doe or how it can go horribly wrong. Financial leverage uses obligations (debt) to amplify purchasing power, and gains if successfully invested.

    *) a complete and utter lack of law enforcement, with governments usually becoming at least passively complicit in the frauds.

    But of course, the Fed does not want to pursue thinking along those lines. Dangerous, even for an “independent” institution.

    I maintain my stance that there can be no lasting recovery without correcting the flaws in our financial and regulatory systems.

    Anticipating some blowback about casting the current situation in the same framework as the others, let me say this: it ain’t over yet. Wake me up when we see an upturn in the participation rate and when unemployment declines to south of 7%.