I identify growth takeoffs using the structural break method detailed in Hausmann, Pritchett and Rodrik (2005)[1]. This method has the advantage over the more commonly used Bai-Perron test in that is helps identify the episodes of prolonged and accelerating growth, ruling out the instances of recoveries from bad shocks. I modify the Hausmann, Pritchett and Rodrik methodology to make it applicable to historical growth data. I use similar technique to identify the episodes of growth collapses.
I find that currency crises are significant positive predictors of growth take-offs, especially in the post World War II period. The currency crises episodes, however, were reducing the probability of growth take-offs during the Gold Standard era. I also find that the average export growth in the five years following a currency crisis was 5.6% above the historical mean in post-World War II years, whereas during the Gold Standard era, the corresponding deviation of export growth from the mean was not statistically different from zero. This may be interpreted as the evidence in favor of the hypothesis that the “resumption rule” of the Gold Standard era – the implicit rule prescribing a prompt return to of the original parity with gold following a currency crisis- may have contributed to the overvaluation of the real exchange rate and dampening of the economic activity in the long run.
The results of the paper confirm the intuition that twin crises are likely to significantly dampen economic activity even in the long run. Twin crises are found to be positive predictors of growth collapses during 1980-2003, and negatively influencing the probability of growth take-offs during the Gold Standard years.