New Evidence on the Impact of Financial Crises in Advanced Countries

Romer, Christina D.; Romer, David

doi:10.3386/w21021

Cited by 73 publications

(93 citation statements)

References 18 publications

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“…They estimate autoregressive growth equations, using data from 1960 to 2008, and find that a financial crisis has a durable effect of reducing GDP by 2 percentage points. Romer and Romer (2015) create a new measure of financial crises based on semiannual Organisation for Economic Co-operation and Development (OECD) narratives about member countries. Romer and Romer (2015) use this measure and regression analysis to calculate the short-term effects of a financial crisis.…”

Section: Figure 1: Estimates Of the Net Benefits Of Additional Tier Omentioning

confidence: 99%

“…Romer and Romer (2015) create a new measure of financial crises based on semiannual Organisation for Economic Co-operation and Development (OECD) narratives about member countries. Romer and Romer (2015) use this measure and regression analysis to calculate the short-term effects of a financial crisis. We use results from Romer and Romer (2015) for the short term effects, and Furceri and Mourougane (2012) for the long-run effects.…”

Section: Figure 1: Estimates Of the Net Benefits Of Additional Tier Omentioning

confidence: 99%

“…The output costs associated with a financial crisis are estimated by considering short-run and long-run output costs. Short run costs are taken primarily from recent research by Romer and Romer (2015) that is adjusted to focus more heavily on the experience of large, advanced economies which are more similar to the United States. The long-run costs are estimated assuming that financial crisis either have permanent or temporary but persistent effects.…”

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confidence: 99%

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An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US

Firestone

Lorenc

Ranish

2017

FEDS

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We evaluate the economic costs and benefits of bank capital in the United States. The analysis is similar to that found in previous studies though we tailor the analysis to the specific features and experience of the U.S. financial system. We also make adjustments to account for the impact of liquidity and resolution-related regulations on the probability of a financial crisis. The conceptual framework identifies the benefits of bank capital with a lower probability of financial crises, which decrease economic output. The costs of bank capital are identified with increases in banks' cost of funding. These increases are passed along to borrowers in the form of higher borrowing costs, resulting in a lower level of economic output. Optimal capital levels maximize the difference between benefits and costs, or maximizes net benefits. Using a range of empirical estimates, we find that optimal bank capital levels in the United States range from just over 13 percent to over 26 percent.We assess the benefits of bank capital through calculating (1) how the probability of a financial crisis declines as the economy-wide level of bank capital increases and (2) the output cost of a financial crisis. The probability of a financial crisis is estimated using a bottom up approach that uses bank-level data from advanced economies and a top down approach that uses aggregate data from the same economies. The output costs associated with a financial crisis are estimated by considering short-run and long-run output costs. Short run costs are taken primarily from recent research by Romer and Romer (2015) that is adjusted to focus more heavily on the experience of large, advanced economies which are more similar to the United States. The long-run costs are estimated assuming that financial crisis either have permanent or temporary but persistent effects. We find that the net present value of the output cost of a financial crisis ranges from roughly 40 to 100 percent of annual GDP.The costs of bank capital arise from the effect of capital on banks' cost of funding. Bank equity is more expensive than debt, but an increase in capital makes investing in banks less risky. Informed by recent research that focuses on U.S. banks, we assume that a bit less than 50 percent of the increase in capital costs is offset by the reduced risk of bank equity. Overall, our results suggest that if banks pass all of the increase in funding costs onto borrowers then borrowing rates would increase by 0.07 percentage points. We also consider a situation in which only half of the increase is passed onto borrowers.Considering the benefits and costs of bank capital in the U.S. that we measure, the level of capital that maximizes the difference between total benefits and total costs ranges from just over 13 percent to Page 2 of 51 just over 26 percent. The reported range reflects a high degree of uncertainty and latitude in specifying important study parameters that have a significant influence on the resulting optimal capital level, such as the output cost of a fi...

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Section: Figure 1: Estimates Of the Net Benefits Of Additional Tier Omentioning

confidence: 99%

Section: Figure 1: Estimates Of the Net Benefits Of Additional Tier Omentioning

confidence: 99%

mentioning

confidence: 99%

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An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US

Firestone

Lorenc

Ranish

2017

FEDS

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“…This is an important distinction. Romer and Romer (2015) argue that the use of descriptive methods has resulted in results that are not robust when evaluated with econometric estimation. We show the very opposite in this instance.…”

Section: Discussionmentioning

confidence: 99%

“…The assumption that inter-war banking crises were more severe in their effects lingers in the literature; for example, in a study of the OECD economies during the period 1967-2007Romer and Romer (2015 assert that banking crises before World War II distort our understanding of the impact of banking crises in more recent years by leading us to believe that the effect is large and persistent -they find that banking crises had mild shortterm effects. This paper contributes to the literature by explicitly comparing results for the inter-war and post-war periods for the same set of 24 countries.…”

Section: Introductionmentioning

confidence: 99%

The effects of systemic banking crises in the inter-war period

Rocha

Solomou

2015

Journal of International Money and Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. An electronic version of the paper may be downloaded Terms of use: Documents in EconStor may• from the SSRN website:www. SSRN.com • from the RePEc website:www. RePEc.org • from the CESifo website:T www.CESifo-group.org/wpT ISSN 2364-1428CESifo Working Paper No. 5271 The Effects of Systemic Banking Crises in the Inter-War Period Abstract This paper examines the time-profile of the impact of systemic banking crises on GDP and industrial production using a panel of 24 countries over the inter-war period and compares this to the post-war experience of these countries. We show that banking crises have effects that induce medium-term adjustments on economies. Focusing on an eight-year horizon, it is clear that the negative effects of systemic banking crises last over the entirety of this time-horizon. The effect has been identified for GDP and industrial production. The adverse effect on the industrial sector stands out as being substantially larger in magnitude relative to the macroeconomic effect. Comparing the results across long-run historical periods for the same selection of countries and variables identifies some differences that stand out: the short term macroeconomic impact effects are much larger in the post-war period, suggesting that the propagation channels of shocks operate at a faster pace in the more recent period. Moreover, the time-profile of effects differs, suggesting that modern policies may be modulating the temporal shape of the response to banking crises shocks. However, the broad magnitude of the adverse effect of banking crises remains comparable across these time periods.JEL-Code: E600, N000, N200, G010.Keywords: local projections, banking crises, financial crises, economic history, inter-war. Bruno Rocha University of Cambridge IntroductionThis paper examines the time-profile of the impact of systemic banking crises on GDP and industrial production using a panel of 24 countries over the inter-war period and compares this to the post-war experience of these countries. The main aim of the paper is to clarify our understanding of the impact of banking crises during the inter-war period. The choice of countries is partly determined by historical data availability but we are able to study a diverse set of economies with differences in production structures, per capita income, and financial depth. Although there is significant general interest on the inter-war period in the literature on financial crises, partly because banking c...

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Contagion or interdependence? Comparing spillover indices

Islam

Volkov

2021

Empir Econ

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We propose a novel risk measure that is built on comparing high-frequency time-varying volatility and low-frequency return spillover estimates. This measure permits to identify the markets that are epidemic in their complex interdependence. We conjecture that initially a highly volatile market experiences episodes of risk transmission, but only later absorbs risk and becomes an epidemic market. Moreover, we can detect newly emerging ‘contagion’ in the system. We examine the behaviour of 30 global equity markets and compare spillover measures, which encapsulate many large and small crises episodes. Instead of relying on ex post crisis information, our model identifies crises periods. An important implication of the proposed approach is that highly interrelated markets, such as China, are less likely to transmit a global economic crisis under the current interdependence setting.

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New Evidence on the Impact of Financial Crises in Advanced Countries

Cited by 73 publications

References 18 publications

An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US

An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US

The effects of systemic banking crises in the inter-war period

Contagion or interdependence? Comparing spillover indices

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