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Weathering the financial crisis: good policy or good luck?

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  • Stephen Cecchetti
  • Michael R King
  • James Yetman

Abstract

The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 351.

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Length: 28 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:bis:biswps:351

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Keywords: financial crisis; principal components;

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References

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  1. Jean Imbs, 2010. "The First Global Recession in Decades," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 58(2), pages 327-354, December.
  2. Gaston Gelos & Robert Rennhack & James P Walsh & Pelin Berkmen, 2009. "The Global Financial Crisis," IMF Working Papers 09/280, International Monetary Fund.
  3. Andrew K. Rose & Mark M. Spiegel, 2010. "Cross-Country Causes and Consequences of the Crisis: An Update," NBER Working Papers 16243, National Bureau of Economic Research, Inc.
  4. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Working Papers 132010, Hong Kong Institute for Monetary Research.
  5. Matteo Ciccarelli & Benoît Mojon, 2008. "Global inflation," Working Paper Series, Federal Reserve Bank of Chicago WP-08-05, Federal Reserve Bank of Chicago.
  6. Olivier J. Blanchard & Mitali Das & Hamid Faruqee, 2010. "The Initial Impact of the Crisis on Emerging Market Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
  7. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2010. "Market freedom and the global recession," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7884, C.E.P.R. Discussion Papers.
  8. Andrew Filardo & Jason George & Mico Loretan & Guonan Ma & Anella Munro & Ilhyock Shim & Philip Wooldridge & James Yetman & Haibin Zhu, 2010. "The international financial crisis: timeline, impact and policy responses in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 21-82 Bank for International Settlements.
  9. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-country causes and consequences of the 2008 crisis: early warning," Working Paper Series, Federal Reserve Bank of San Francisco 2009-17, Federal Reserve Bank of San Francisco.
  10. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
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Citations

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Cited by:
  1. Branimir Jovanovic, 2012. "How Policy Actions Affect Short-term Post-crisis Recovery?," CEIS Research Paper, Tor Vergata University, CEIS 253, Tor Vergata University, CEIS, revised 05 Oct 2012.
  2. Feldkircher, Martin, 2012. "The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 26/2012, Bank of Finland, Institute for Economies in Transition.
  3. Carlos Montoro & Liliana Rojas-Suarez, 2012. "Credit in times of stress: lessons from Latin America," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  4. Pablo Federico, 2012. "Developing an Index of Liquidity-Risk Exposure: An Application to Latin American and Caribbean Banking Systems," Research Department Publications, Inter-American Development Bank, Research Department 4811, Inter-American Development Bank, Research Department.
  5. Jan Willem van den End, 2013. "A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio," DNB Working Papers, Netherlands Central Bank, Research Department 372, Netherlands Central Bank, Research Department.
  6. Michiel Bijlsma & Ferry Haaijen & Casper van Ewijk, 2014. "Economic growth and funded pension systems," CPB Discussion Paper 279, CPB Netherlands Bureau for Economic Policy Analysis.
  7. Joshua Aizenman & Ilan Noy, 2012. "Macroeconomic Adjustment and the History of Crises in Open Economies," NBER Working Papers 18527, National Bureau of Economic Research, Inc.
  8. Josef Schreiner, 2012. "Developments in Selected CESEE Countries: Heterogeneous Growth Performance, Improving Fiscal and External Accounts," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 8-37.
  9. repec:udt:wpbsdt:2012-03 is not listed on IDEAS
  10. Aysun, Uluc & Hepp, Ralf, 2013. "Identifying the balance sheet and the lending channels of monetary transmission: A loan-level analysis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 2812-2822.
  11. Jesús Crespo Cuaresma & Martin Feldkircher, 2012. "Drivers of Output Loss during the 2008–09 Crisis: A Focus on Emerging Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 46-64.
  12. Carlos Montoro & Liliana Rojas-Suarez, 2012. "Credit at times of stress: Latin American lessons from the global financial crisis," BIS Working Papers 370, Bank for International Settlements.
  13. Neville Arjani & Graydon Paulin, 2013. "Lessons from the Financial Crisis: Bank Performance and Regulatory Reform," Discussion Papers 13-4, Bank of Canada.
  14. Lillie Lam & James Yetman, 2013. "Asia’s decoupling: fact, forecast or fiction?," BIS Working Papers 438, Bank for International Settlements.
  15. Liliana Rojas-Suarez and Carlos Montoro, 2012. "Credit at Times of Stress: Latin American Lessons from the Global Financial Crisis - Working Paper 289," Working Papers, Center for Global Development 289, Center for Global Development.

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