Financial Crises, Output Losses, and the Role of Structural Reforms

Abstract

Financial crises take a heavy toll on output growth. We assess the role of structural reforms in reducing the output losses resulting from financial crises across advanced economies, emerging and developing economies, and low‐income developing economies. We also revisit the role of macroeconomic policies in this context. The impact of crises on output growth differs between types of crises and economies, thus warranting sample splits along these lines. Some but not all reforms and policies help to reduce the output losses of crises in the medium term, highlighting the need not to overgeneralize the effectiveness of reforms and policies. Further research is warranted to further explore the heterogeneity in the impact of financial crises on output growth and to better understand when and how specific structural reforms and macroeconomic policies can mitigate the output costs of financial crises. (JEL E32, E44, E63, G28, O47)

Understanding the Finance–Growth Nexus from a Multidimensional Perspective

“…Procyclical lending means that there will be excessive credit in boom times, which has a very high probability of ending in financial crises and economic recessions (Aikman et al, 2015; Baron & Xiong, 2017; Dell’Ariccia et al, 2016; Gorton & Ordoñez, 2019; Jordà et al, 2011; Jordà et al, 2013; Schularick & Taylor, 2012). A financial crisis not only temporarily lowers output but also, and more importantly, permanently damages productivity and growth potential (Cerra & Saxena, 2008; Furceri & Mourougane, 2012; Huber, 2018; Queralto, 2020; Reinhart & Rogoff, 2014; Tola & Waelti, 2018).…”

Financial Crises and Key Economic Sectors of China and India: A Comparative Review of 1991-2010

“…Assessing the output losses and the corresponding policies in advanced, developing and lower income countries, Tola & Waelti (2018) suggested that the crises' impact varies for different economies and not all policy measures are effective to cover the output losses from turmoil. The global financial crisis of 2008 caused a more severe recession in the advanced economies as compared to the emerging ones.…”