Drivers of Output Loss during the 2008–09 Crisis: A Focus on Emerging Europe

We study empirically the role that initial conditions played in the emergence of cross-country heterogeneity in real output loss during the recent global financial crisis. We use a global sample covering over 150 countries and focus on the differences in the determinants of the crisis in emerging Europe compared to those in the rest of the world. We find that the differences in crisis severity in emerging Europe can only partly be explained by the factors that appear to be important for the global sample. Our results indicate that for the European emerging economies, growth above potential before the crisis coupled with external disequilibria as well as financial openness were particularly important mechanisms that increased the severity of the crisis in terms of output loss. We also find some evidence that pre-crisis FDI inflows softened the negative real output effects of the crisis in the region.