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Is Economic Recovery a Myth? Robust Estimation of Impulse Responses

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  • Coen N. Teulings

    (CPB, The Hague, and University of Amsterdam)

  • Nick Zubanov

    (CPB, The Hague)

Abstract

We estimate the impulse response function (IRF) of GDP toa banking crisis, applying an extension of the local projectionsmethod developed in Jorda (2005). This method is shown to bemore robust to misspecification than calculating IRFs analytically. However, it suffers from a hitherto unnoticed systematicbias which increases with the forecast horizon. We propose asimple correction to this bias, which our Monte Carlo simulations show works well. Applying our corrected local projectionsestimator to a panel of 99 countries observed between 1974-2001,we find that an average banking crisis yields a long-term GDP lossof around 10 percent with little sign of recovery within 10 years.GDP losses to banking crises are even more severe in Africancountries. Like the original Jorda's (2005) method, our extensionof it is quite widely applicable.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-040/3.

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Date of creation: 13 Apr 2010
Date of revision: 07 Jul 2011
Handle: RePEc:dgr:uvatin:20100040

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Web page: http://www.tinbergen.nl

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Keywords: banking crisis; impulse response; panel data;

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  1. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
  2. Chong, Yanping & Jordà, Òscar & Taylor, Alan M., 2010. "The Harrod-Balassa-Samuelson Hypothesis: Real Exchange Rates and their Long-Run Equilibrium," CEPR Discussion Papers 7902, C.E.P.R. Discussion Papers.
  3. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  4. Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
  5. 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.
  6. Jon Faust & Jonathan H. Wright, 2011. "Efficient Prediction of Excess Returns," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 647-659, May.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. Cai, Xiaoming & Den Haan, Wouter, 2009. "Predicting recoveries and the importance of using enough information," CEPR Discussion Papers 7508, C.E.P.R. Discussion Papers.
  9. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
  10. Jon Faust & Jonathan H. Wright, 2008. "Efficient Prediction of Excess Returns," NBER Working Papers 14169, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The growth problem
    by chris dillow in Stumbling and Mumbling on 2011-08-07 11:01:20
  2. Another case for plan B
    by chris dillow in Stumbling and Mumbling on 2011-07-27 13:31:10
  3. Recession & work ethics
    by chris dillow in Stumbling and Mumbling on 2013-06-18 13:27:00
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Cited by:
  1. Oscar Jorda & Moritz Schularick & Alan Taylor, 2012. "When Credit Bites Back: Leverage, Business Cycles and Crises," Working Papers 1224, University of California, Davis, Department of Economics.
  2. Romain Bouis & Orsetta Causa & Lilas Demmou & Romain Duval, 2012. "How quickly does structural reform pay off? An empirical analysis of the short-term effects of unemployment benefit reform," IZA Journal of Labor Policy, Springer, vol. 1(1), pages 1-12, December.
  3. Torben M. Andersen & Jonas Maibom & Michael Svarer & Allan Sørensen, 2013. "Do Business Cycles Have Long-Term Impact for Particular Cohorts?," Economics Working Papers 2013-26, School of Economics and Management, University of Aarhus.
  4. Adam Elbourne & Coen Teulings, 2011. "The potential of a small model," CPB Discussion Paper 193, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Davide Furceri & Aleksandra Zdzienicka, 2010. "The Consequences of Banking Crises for Public Debt," OECD Economics Department Working Papers 801, OECD Publishing.
  6. Schularick, Moritz, 2012. "Public debt and financial crises in the twentieth century," Discussion Papers 2012/1, Free University Berlin, School of Business & Economics.
  7. Davide, Furceri & Aleksandra, Zdzienicka, 2010. "Banking Crises and Short and Medium Term Output Losses in Developing Countries: The Role of Structural and Policy Variables," MPRA Paper 22078, University Library of Munich, Germany.
  8. Furceri, Davide & Guichard, Stéphanie & Rusticelli, Elena, 2012. "The effect of episodes of large capital inflows on domestic credit," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 325-344.
  9. Moritz Schularick & Alan Taylor & Oscar Jorda, 2013. "When Credit Bites Back," 2013 Meeting Papers 71, Society for Economic Dynamics.
  10. Davide Furceri & Lorenzo E. Bernal-Verdugo & Dominique M. Guillaume, 2012. "Crises, Labor Market Policy, and Unemployment," IMF Working Papers 12/65, International Monetary Fund.
  11. 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.

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