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Predicting recoveries and the importance of using enough information

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  • Cai, Xiaoming
  • Den Haan, Wouter

Abstract

Several papers that make forecasts about the long-term impact of the current financial crisis rely on models in which there is only one type of financial crisis. These models tend to predict that the current crisis will have long lasting negative effects on economic growth. This paper points out the deficiency in this approach by analyzing the ability of "one-type-shock" models to correctly forecast the recovery from past economic downturns. It is shown that these models often overestimate the long-run impact of recessions and that slightly richer models that allow the effects of recessions to be both persistent and transitory predict recoveries much better.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7508.

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Date of creation: Oct 2009
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Handle: RePEc:cpr:ceprdp:7508

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Keywords: financial crisis; forecasting; great recession; unit root;

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  1. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-57, March.
  2. Oscar Jorda, 2007. "Inference for Impulse Responses," Working Papers 77, University of California, Davis, Department of Economics.
  3. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November.
  4. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October.
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Cited by:
  1. Davide Furceri & Aleksandra Zdzienicka-Durand, 2010. "Banking Crises and Short and Medium Term Output Losses in Developing Countries: The Role of Structural and Policy Variables," Post-Print halshs-00491089, HAL.
  2. Coen N. Teulings & Nick Zubanov, 2010. "Is Economic Recovery a Myth? Robust Estimation of Impulse Responses," Tinbergen Institute Discussion Papers 10-040/3, Tinbergen Institute, revised 07 Jul 2011.
  3. Davide Furceri & Aleksandra Zdzienicka, 2011. "How Costly Are Debt Crises?," IMF Working Papers 11/280, International Monetary Fund.
  4. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables," World Development, Elsevier, vol. 40(12), pages 2369-2378.
  5. Bernal-Verdugo, Lorenzo E. & Furceri, Davide & Guillaume, Dominique, 2013. "Banking crises, labor reforms, and unemployment," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1202-1219.
  6. Romain Duval & Mehmet Eris & Davide Furceri, 2011. "The Effects of Downturns on Labour Force Participation: Evidence and Causes," OECD Economics Department Working Papers 875, OECD Publishing.

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