73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

Are recoveries from banking and financial crises really so different?

Thursday, 29 March 2012: 9:30 AM
Beth Anne Wilson, PhD , International Finance, Federal Reserve Board, Washington D.C.
This paper (which is completed) studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years, resulting in observations on 271 recessions.  Focusing specificaly on the performance of output after the recession trough, we find little difference in the pace of output growth across types of recessions.  In particular, banking and financial crises do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss.  Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions.  This finding leads us to our second result that recessions can lead to sustained output losses relative to pre-crisis trends, particularly if the recession was long.  Focusing on the United States, the depth and duration of the recent recession have acted to balance out the recovery, leaving output, until recently, about on pace with average recoveries in advanced economies.  However, the composition of the recovery is unusual.  Exports and investment have outperformed the median recvoery so far while consumption, housing, and employment have languished.  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.