Financial Crises and Economic Activity

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24 August 2009
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24 August 2009

This paper was prepared for the Federal Reserve Bank of Kansas City's symposium at Jackson Hole, Wyoming, August 2009. An updated version of this paper has been posted on 14 September 2009.


This paper studies the length, depth and output costs of a sample of 40 systemic banking crises in 35 countries since 1980 to assess the likely real impact of the current crisis. Most, but not all, systemic banking crises in our sample coincide with a sharp contraction in output from which it takes several years to recover. The current financial crisis is unlike any others in terms of initial conditions, industrial and institutional structures, levels of development, degrees of openness, policy frameworks and external conditions. Simply averaging outcomes of past crises to get a reading on the current one is therefore likely to be misleading regardless of the sample or subsample. With this in mind we go on to study the determinants of the output losses from past crises. Our findings suggest that the costs are higher when the banking crisis is accompanied by a currency crisis or when growth is low immediately before the onset of the crisis. Furthermore, when it is accompanied by a sovereign debt default, a systemic banking crisis is less costly. The final part of the paper takes a longer-term view and study the impact of crises on potential output several years down the road. We find that many systemic banking crises have had lasting negative effects on the level of GDP. And even in those cases in which trend growth was higher after the crisis than it had been before, making up for the output loss resulting from the crisis itself took years.